Paul Wilmott, quant with a heart and a brain

Newsweek has a fascinating article on finance quant Paul Wilmott.

Wilmott’s an important, influential figure in finance. His story is well worth reading because it shows there’s a way to do quantitative finance well. Due to the complexity of human brains and human society, quantitative finance can never be like physics in its certitude. But quant models can be powerful analytical tools supplementing and magnifying the power of the human brain. Unfortunately, too many quants have revered their equations as if they were physics equations or pronouncements from the Oracle of Delphi.

You know Wilmott’s worth listening to when you learn that Nassim Taleb — notorious for contemptuously dismissing as quacks and charlatans almost all financial practitioners and academics — praises Wilmott:

Nassim Taleb, the mathematician and author of the bestseller The Black Swan, calls him the smartest quant in the world. “He’s the only one who truly understands what’s going on … the only quant who uses his own head and has any sense of ethics,” says Taleb.

Wilmott’s also an interesting character with an unusual background (which probably helps him think outside the box):

Born in Birkenhead, a small town outside Liverpool, Wilmott studied applied math at Oxford. In his spare time, he dabbled in juggling and competitive ballroom dancing. After earning a Ph.D. in fluid mechanics from Oxford in 1985, he got his start as an applied mathematician, working on jet-engine turbines for Rolls-Royce and calculating detonation sites for an explosives company. In the late 1980s, he started applying math to finance. His first burst of fame came in 1993 when he co-wrote a textbook on derivatives. Soon he’d made a name for himself as a contrarian guru, writing more textbooks, and giving speeches around the world to rooms full of bankers. From 2001 to 2005 he ran a $170 million hedge fund that returned an average of 15 percent a year.

Though a quant, Wilmott isn’t in finance just for money or the intellectual thrill of developing mathematical models of financial markets. He readily expresses anger at the bankers and unthinking quants who have gotten rich blowing up the world’s economy and escaped punishment:

Wilmott walks by several tube stops, deep in conversation on the topic that gets him most agitated these days: structured credit, the area of finance most at fault in the crash, and where quants inflicted the most damage by applying mathematical models they swore could predict default rates. “A complete lapse of ethics and responsibility,” he calls it…

[Wilmott]’s also stunned by the lack of outrage over the financial mess. The violence that erupted at this year’s G20 summit wasn’t anywhere near what he thought it should’ve been. “Where the hell was everybody? If people aren’t angry now, they’ll never be.”

Posted by James on Monday, June 01, 2009