The Problem With Quants

"Quants" as they are called, are basically economists who are mathematicians and think everything can be modeled using math and computers. And while certainly they do amazing work, there is one fundamental flaw with quantitative analysis and that is they're using math to predict social beings called humans.

If humans were robots or planets or something else that operated according to physical laws or principles, then quants would be right 100% of the time. They could predict human behavior, schedule it actually, and predict everything that would ever happen. Quants could also go so far as being able to predict girls and figure out what they want.

Obviously, this is impossible.

And the reason it's impossible is because humans are not robots. We change our minds, and without rhyme or reason half the time. We don't abide by hard and fast laws like gravity and physics, but are inherently chaotic. Ergo, developed the most advanced model in the world, it will still, inevitably be wrong.

This is why I like to approach economics for what it is; an art.

Economics is really more like "The Force" than it is some kind of engineering program. Many commentators and economists I've spoken with lament how the profession has more or less become a math degree tailored towards economics, and not a study that accepts there's some aspect of art to it. That so much emphasis is put on statistics, math, econometrics and so forth, the economist loses the forest from the tree and thus develop models that failed miserably to value securities such as CDO's, SIV's and other mortgage related securities.

Now, most quants know that the whole world can't be modeled. They know the limitations of their models, but then you get some die hard quants who never bothered to take an independent thought in their lives and really think that unless it runs through a statistical analysis program and shows a correlation, then it's worthless.

Case in point;

I had a quant berate me for saying housing starts predicted spikes in unemployment 6-18 months in advance. I based it on a chart showing housing starts and unemployment where, reliably, as housing tanked, unemployment would peak 6-18 months later. He, however, ran it through a statisical program (I forget the name of it) and said there was NO statistically significant relationship. That I didn't know what I was talking about and blah blah blah. So naturally when unemployment started its most recent exponential growth upward, the drawbacks of being a head-in-the-sand quant versus a Jedi Master made itself painfully obvious once again.


Now, as regular Cappy Cap readers know, this is one of my favorite charts, but it shows you a very important lesson about economics and life in general; just because you aren't a professional NEVER question your own eyes. The professionals can be wrong and frequently are. And the more you treat something that is indeed an art like a science, the worse you will become at predicting it.

Just ask quants how many models they have that have helped them land dates.