This is what Donald Van Deventer (apparently one of the godfathers of quantitative risk "management") has to say about my Lecturing Birds On Flying:
"This book is the risk management equivalent of someone who says automobiles are useless because a few drivers crashed. The author has absolutely no understanding of risk management in either theory or practice. Don't waste your money"
Pretty adult stuff, uh? Is that how far your PhD in Business Economics from Harvard can take you, Don? No need to deal with the issues head on, is there? No need to actually try to rebut my arguments, right? Let´s just take the easy path of cheap ad hominism. Your sophistication is illuminating, Don. Absolutely awe-inspiring. But of course you are an Ivy Leaguer.
Actually I am grateful for Don´s ridiculously empty attack. It confirms that which I of course strongly suspected: I AM RIGHT, and my book is right. And that bothers Don and his peers very very much. After all, as Taleb has said many times, their entire business is being threatened. Don´s childish, issues-skirting response tells me that Lecturing Birds has bothered those bent on preserving the quantification of finance without regards to the collateral damages or the actual soundness of the math, and that does not bother me one bit. They don´t want the message being spread out, and that makes me smile.
I can actually borrow from Don´s analogy and, boomerangishly, throw it back at him. You see, Don, unlike most (all?) quant finance models, automobiles in fact do provide an unquestionably useful service and thus were an unquestionably relevant and needed innovation; also unlike quant finance, automobiles don´t have a tendency to structurally fail, they actually work pretty well; and, too in sharp contrast with quant finance concoctions, in those occasions when automobiles are shown to be defective they are immediately taken out of circulation, not preserved and ceasessly peddled and promoted. What Don and his peers are proposing is the equivalent of Toyota NOT recalling those deleteriously malfunctioning Lexus, instead keeping them on the road (keeping them harming people) so that the engineers who work on the cars don´t lose their status and paychecks. How´s that for responsible risk management!
The quant finance models that I criticize in my book ARE in fact utterly useless because they have a structural, inbred, unavoidable tendency to crash. In fact, they are worse than useless, as they can cause lots of malaise. What kind of individual would promote and peddle useless stuff that can cause trouble, Don?
Did you actually read the book, Don? If so, why don´t you step up and confront the real issues, some of which I am happy to list for you below: - BSM is deeply flawed and can cause trouble and has caused a lot of trouble - VaR is deeply flawed and can cause trouble and has caused a lot of trouble - Reliance on Normality, variance, correlation, expected return is deeply flawed and can cause trouble and has caused a lot of trouble - The last three mayor market crisis were all aided, abetted, and caused by the widespread use of flawed quantitative models - Using VaR as the regulatory measure for trading capital charges is a huge mistake that leads to the (hidden) build up of lethal risk trough massive leverage - BSM was given the Nobel for something that doesn´t (can´t) work in real life and that is based on insultingly erroneous assumptions - Flawed models are embraced by otherwise no-nonsense pros as alibis for reckless, otherwise not permitted, behavior; that is, if analysts are oftentimes known as the “whores of banking”, complicit financial mathematicians would in fact become…well, you fill the blanks - Quantitative risk management has not demonstrably solved any priorly unsolved problem, while creating lots of new, otherwise non-existent, problems
Not a single critic of my book and ideas (bar for perhaps the formidable Aaron Brown) has confronted the issues and tried to refute the above points (and many more). Not a single one. And these guys, a la Don, all have PhDs from top unis. And yet, all they seem to be able to do is fire mud at my face, in a decidedly un-Ivy League manner. Didn´t they have debate class at Harvard, Don? Or is it that mad quant finance folk can do only two things, namely draw equations and hurl cheap aspersions?
If you read my book you´ll see that one of my intentions (a main intention) was to humbly contribute to the kick-starting of a serious and mature debate on the true merits of quant finance, so that both sides can try to reach a healthy understanding for the sake of the markets’ and the economy´s health (not to mention the actual relevance of academic research). Given Don´s and his peers´ infantile reactions, it is obvious that, so far at least, I have not succeeded. Perhaps I made the mistake of assuming that I was talking to adults.
Don´s critique of Lecturing Birds adds absolutely nothing to this most important of debates. Alike his friends (all 100% dependent on the quant stuff remaining around in financeland; the banning of the models must be avoided at all costs, lest some people may have to go back to being the lowly college professor at family reunions as opposed to the one who made it to Wall Street), he seems incapable of even defending his own point of view. He can´t even stand up and shout “VaR is great, the most glorious invention of all times” or “Quantitative models had nothing to do with the credit crisis”. And that´s because, well, he really can´t. Unless he is willing to lie through his teeth that is.
Don is so coarsely rustic that he doesn´t even realize that in my book I don´t dismiss all quantitative finance efforts, but rather point out that there are several demonstrable episodes of horrible malaise caused by certain (rather quite famous) models and that such malfunctioning vehicles should be terminally recalled, and that we should be watchful going forward and ruthlessly terminate any future malfunctioning model, and that that should involve a comprehensive across-the-board no holds barred re-examination of the need for models.
Don´s critique is that of a child. Or, as Nassim would put it, that of a half-man. This debate is far too serious to be left to childish whinging. Don´t waste your time on Don.