Monday, March 13, 2017

Worth repeating

In Stuart Dreyfus on Richard Bellman, Dynamic Programming, Quants and Financial Engineering, David Glasner quotes Dreyfus, and considers the quote:
The place that [dynamic programming] is used the most upsets me greatly — and I don’t know how Dick would feel — but that’s in the so-called “quants” doing so-called “financial engineering” that designed derivatives that brought down the financial system. That’s all dynamic programming mathematics basically. I have a feeling Dick would have thought that’s immoral. The financial world doesn’t produce any useful thing. It’s just like poker; it’s just a game. You’re taking money away from other people and getting yourself things. And to encourage our graduate students to learn how to apply dynamic programming in that area, I think is a sin.

Allowing for some hyperbole on Dreyfus’s part, I think he is making an important point, a point I’ve made before in several posts about finance. A great deal of the income earned by the financial industry does not represent real output; it represents trading based on gaining information advantages over trading partners. So the more money the financial industry makes from financial engineering, the more money someone else is losing to the financial industry, because every trade has two sides.

1. Finance is non-productive.
2. To reduce financial cost, reduce the size of finance.

Glasner's view that it represents trading based on gaining information advantages is superfluous, diversionary, and irrelevant. I'm not repeating that part.

Actually, saying that financial income comes from unfair information advantages is the same as saying finance guys are cheaters. A lot of people probably like that thought. A lot of people complain that not enough finance guys were put in jail for creating the financial crisis. I think it's a waste of time to focus on people. We need to focus on what the problem really is, on why the problem arises, and how to stop it from arising.

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