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SEC policy advisor: Trading is Art of War, not physics.

tfors

Joined
1/7/12
Messages
150
Points
38
This guy makes a pretty compelling case: Since feedback loops are created consciously and intelligently, tools from physics or biology do not work in modelling financial markets. Markets are more akin to war. http://www.businessinsider.com/here...ll-never-work-though-traders-may-dream-2010-8

I was thinking about doing a minor specialization in statistical mechanics (next to major comp sci), but this article makes me wonder if that would be the right move, if your goal is to learn to understand financial markets better.

What do you think?
 
How exactly do you think statistical mechanics will help you? You will learn about the maxwell-boltzmann distribution, how to calculate the the average velocity of a particle in a gas, how to calculate the energy changes on an isolated system under the influence of various changes of state etc. Entropy. Nothing to do with finance. If you want to understand markets better:

Take courses in basic economics.
Take courses in basic finance.
Take courses in basic statistics.
Learn how to program in e.g. python so you can do data analysis using libraries such as pandas.
Have an extremely large amount of common sense.
Do not listen to what other people tell you about the markets - house prices will never crash! House prices in London will never crash! (This is what people are telling me right now) - and have a strong degree of critical thinking. Think through the various incentives of the different actors involved - buyers, sellers, traders, governments.
Try your very hardest to understand risk. This topic alone is so complicated you can spend your life studying it in isolation.
Realise that even with all that, you cannot predict the future and you shouldn't try.
Realise that to be considered a good investor you need to make x amount every day/week/month/year/decade, even if there is nothing worthy to buy. This is a bit like how in academia you are expected to publish x papers per year, with no consideration of the quality.

Never, ever underestimate the stupidity and hubris of the general public.
 
Barny said:
How exactly do you think statistical mechanics will help you? ...
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Thank you for your post, I will keep all in mind. Basic economics/statistics etc. I already have under my belt fortunately.

Regarding your question: My study-advisor told me I could go two ways: 1) risk analysis and derivatives, which will deal heavily with partial derivative equations etcetera 2) agent based modeling. For that you would do well having a background in statmech.

For me ABM made a lot of sense, but the article I referenced above basically tells it's bull. And I'd like to study something that makes sense of course and is helpful.
 
Advice #10: Do not listen to what your professors say you should do to understand finance unless they themselves have worked in the industry for 20+ years.
 
Barny said:
Do not listen to what other people tell you about the markets - house prices will never crash! House prices in London will never crash! (This is what people are telling me right now)
Click to expand...

What do you think?
 
My study-advisor told me I could go two ways: [...]will deal heavily with partial derivative equations etcetera

I would be very worried if those were your advisor's exact words, not to mention if those words are yours.
 
bigbadwolf said:
You have to be earning a merchant banker's salary and bonus to afford even a terraced house in London.
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yeah, it's huge.

I visit a judo club (oldest in Europe) in a chic area of SW every now and again. The building is in high demand. It' staggerimg.
 
British economic policy has only one goal: keep up house prices in London and the home counties.
 
bigbadwolf said:
What do you think?
Click to expand...

My girlfriend is a lawyer for a large city law firm. You can check on rollonfriday how much such lawyers get paid. She cannot get a large enough mortgage to afford even a 2 bedroom flat in a reasonable area (Richmond, Putney, Clapham). If she cannot afford a flat, then I fail to see how those who earn the average London salary can - the situation is completely unsustainable. From the open days, it seems that couples with a large deposit from the bank of mum and dad are the ones able to get enough credit. I'd like to see how they manage as interest rates increase.

Of course the situation is very complicated though:

1) There's a c120,000 shortfall each year between the number of houses built and the number of households formed in the UK, and this has been true for nearly 20 years now. I don't know what the London situation is like, but imagine it to be similar or worse.

2) The government has introduced help to buy, allowing people who shouldn't be getting £400k mortgages to get them.

3) London population growth. If 1) stays true then there might be enough demand from rich foreigners to keep bidding the prices up, or sustain them.

4) The cost of many peoples mortgages is > 50% of salary.

5) House prices in London are 8x average salary, and average prices are now significantly higher than before the great recession, a point in time in which everyone universally agreed there was a real-estate bubble.

So, given all of the above, I think there will be a house price crash if:

1) A UK Government grows some testicles and starts building homes, hopefully in conjunction with scrapping help to buy (they of course won't do that because the people who vote for them, the 50+ age group, have most to lose from a property market devaluation).
2) Interests rates increase significantly.
3) London population growth slows.

I have no idea when and if any of that will happen, but it is certainly possible that London house prices will crash, which is not what most people paying outrageous prices for property in London think. "It's London! It will never crash!" - they seem to have forgotten even 5 years ago.

At the moment, we are going to rent, since you can get a nice place for £1200 pcm which is less than the interest charged on a mortgage for even a terrible property to pay the current inflated prices.
 
Barny said:
At the moment, we are going to rent, since you can get a nice place for £1200 pcm which is less than the interest charged on a mortgage for even a terrible property to pay the current inflated prices.
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I'm using this calculator. Even if you have large down payment (some buildings in NYC require 30% down or more), you may lose out to all-cash offer from foreign buyers. In many cases, renting is a better solution than buying.
 
Andy Nguyen said:
I'm using this calculator. Even if you have large down payment (some buildings in NYC require 30% down or more), you may lose out to all-cash offer from foreign buyers. In many cases, renting is a better solution than buying.
Click to expand...

In the UK recently a 20% deposit was required. For a £300,000 mortgage, that will take most people a significant number of years to build up even if they earn a very good salary. Now, thanks to the government you only need 5% and they'll give you an equity loan for the other 15%. This has led to this situation: http://www.telegraph.co.uk/finance/...to-Buy-in-London-as-prices-become-absurd.html, in the space of a single calendar year.

It's times like these that I really, really despair at living in the UK.
 
Barny said:
In the UK recently a 20% deposit was required. For a £300,000 mortgage, that will take most people a significant number of years to build up even if they earn a very good salary. Now, thanks to the government you only need 5% and they'll give you an equity loan for the other 15%. This has led to this situation: http://www.telegraph.co.uk/finance/...to-Buy-in-London-as-prices-become-absurd.html, in the space of a single calendar year.

It's times like these that I really, really despair at living in the UK.
Click to expand...

"Help to Buy" sums up the whole of the British government's economic policy. My sister-in-law has just bought a poky little terraced house in Ealing for 400,000 pounds. You can't rent forever.
 
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