Don't Blame Math For The Madness Of The Markets

Your surprise at the failure of quant "rocket science" is a little disingenuous ("Failed wizards on Wall Street," Finance, Sept. 21). The plain fact is that the sophisticated mathematical models for stock trading and hedging you describe are, by nature, corrigible--since however perfect markets may be, price systems always contain elements of randomness and perturbation. What mathematics can help traders do is to establish optional strategies in a world of bounded rationality where conduct in markets reflects the way sane people ought to behave in a sane world. Introduce the insanity of market distortions due to errors of judgment (from federal or central bank authorities or firms themselves), and even models operating in the most perfect and information-rich markets fail.

Blaming the math is like blaming horoscopes for a bad day--whether the horoscopes had inspired you to leave the house or shelter at home, you might still have had a terrible day. Here at the University of Oxford we are putting together a new diploma to help "quants" get it right more often; we don't expect to be the solution to market-makers' headaches, but we do believe that better math makes for better trading in the long run.

Mark Gray

Kellogg College

University of Oxford

Oxford, England

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