Those Greedy Quants Almost Took Over the World

1a Jesse's thought on gambling:
As a caveman Mormon, this is my moral definition of gambling. Gambling redistributes something on the basis of chance, without producing anything of value in the process. Granted, there’s an element of chance in everything in life, but most commerce we engage in produces something. If five people stick all their money in a pot, and one gets it, there's no more money, and nothing’s been created. If five people pool their money and buy an interest in a textile company, who uses the money to weave thread into shirts and sell it, they have been involved in creating something, and have hopefully profited. Because the capital used traditional investing is used to create something, I don't consider it gambling. When I buy a stock, the equity I give to the company is usually used to produce something. Gambling doesn’t create anything except the experience of gambling.
If you’re just paying for the experience, as Jesse’s poker implies, gambling still takes from someone else in order to enhance one’s position. In the case of a slot machine, you’ll get something not because you deserved it, worked for it, but entirely because of chance—that is, someone else paid for it. Or in other cases, someone else paid you because you or were just luckier or smarter (had a better understanding of the odds) than them. That seems to take advantage of unlucky/dumb people. I realize this oversimplifies things a LOT, but its my simple metric.

2. Leverage:
I had trouble believing that quants nearly destroyed wall street. I do not have trouble believing that lots of big mortgages, overvalued homes, Fannie Mae, and mortgage securitization did. We bought our home in Vegas when prices were going up 5% a month. Over the course of a few years the price doubled; now it would sell for less than we bought it. About 1 in every 70 homes received a foreclosure filing this April in Vegas. It is upsetting.

6. I like Greenspan's quote a lot: “I found a flaw...in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.” The May 6, 2010 Flash Crash drop in the stock prices that happened one day last month was interesting. The markets at that moment requiring an immediate downward readjustment would not match Greenspan's pre-crash model, though I imagine some bears out there were waiting for it.

7. It seemed that the moral was “greed is bad” and those really greedy guys who tried to make a lot of money ate it big, and boy, they sure had it coming. While I think greed is bad, I'm not convinced that quants are. I also wish there was an epilogue, as I imagine most of the “quants” are probably doing ok. I watched an interview with the author of a book called More Money than God that seems to represent the quants in a more favorable light, which I plan on reading. I enjoyed the book, but I admit I was glad to read Jesse's post.