The Math Hustle

Institutional Investor has a very good article on Wall Street’s abuse of math. Let me explains. Financial economics has an inferiority complex. As a result, the field needlessly uses fancy math to justify itself. This seeps into money management.

The financial industry uses mathematics in a manner that would be mortifying to any other field of science. Academic literature and industry research are rife with pseudo-mathematical nonsense. You don’t have to look far to see where the motivation lies: Many of the authors are either employed by or retained by richly paid investment management and consulting firms. Faced with soaring investor interest in algorithm-powered investment strategies, the habit — indeed, the requirement — today is for firms to use scientific language and notation to nourish the idea that they’ve proved mathematically that there’s a way to systematically beat the market.

They haven’t.

It’s not surprising that more is claimed by their suggestive language than they actually “prove” because the field suffers from a subtle corruption. There is a pattern developing of publishing a semi-quantitative paper and using it as the basis to establish an investment advisory firm, become the seller of an investment product “relying only on math,” and go off on a globe-circling marketing bender. The fastest-growing asset management firms are purveyors of investment products that draw upon mathematical finance research, so theories ridden with poorly specified mathematics and wildly exaggerated results abound.