# How many have you worked in a finance world?

1. Aug 20, 2011

### EternityMech

this goes out to the theoretical physicists out there. have you thought about it or is too degrading and "beneath" you to do so?

2. Aug 20, 2011

### DrChinese

this goes out to the finance wizards out there. have you thought about a career in theoretical physics or is too degrading and "beneath" you to do so?

3. Aug 20, 2011

### Fra

I personally think it's good to distinguisha between your own personal ambitions and standards from an intellectual point of view and whatever you do for a living. Otherwise life would be very hard if I thought that anything that wasn't about the deepest fundamental questions (that is so far open questions) are beneath me.

Then large part of everyday life would be beneath me. Like eat, sleep, crap, talk to friends (goto work included)

I have not worked in finance in the way twofish-quant but my work contains business thinking. Instead I consider some elements of work fresh and inspiring constrasts. I found that creative thinking needs different perspectives, fresh input. Even if you really focus 100% on your pet questions, beeing locked up in a university basement for 50 years is I think not "creative". I do appreciate alot of the non-physics work I do as well, sometimes those things can give you new ideas. Sometimes just the opportunity to travel around the world is refreshing.

/Fredrik

4. Aug 20, 2011

I have.

I'm a Geophizz, not a Theophizz, but I worked as a bank trust and estate tax officer.

As I'm also a lawyer, I can't say I found the work demeaning, as there's much to know in that field as well.

But it's a very easy job to get stale in, as opposed to physics, in which yesterday's hot theory is today's laughingstock.

Then again, fiduciary taxation isn't quite the contact sport that physics is, either.

And, no, I've never entertained the idea of becoming a high school or junior high school physics teacher, as I really don't like kids.

5. Aug 20, 2011

Come on!

What's money next to the sun, the moon, the stars, and the elements, and quantum theory?

6. Aug 21, 2011

This dream about being Richard Feynman or Einstein is kind of like a similar dream that all young soccer players have with Cristiano Ronaldo, or basketball players with Lebron James. It's not a crime to think maybe you could get there with some luck and a ton of hard work, but making huge decisions based on the idea that you have a significant enough chance... it's shocking to realize just how many adults still hold on to these child-like dreams.

To me, a problem is a problem, and I like fixing problems. Having to use my brain in different ways is very exciting. Physics just happens to have some very fun kind of problems, but there are other problems very similar to them.

It's all like a really bizarre psychological game with yourself. There are equally weird people on both sides with weird perspectives who are amusing to observe.

7. Aug 21, 2011

### twofish-quant

Yes, I'm working in finance. Moving to industry was surprisingly difficult psychologically, but after you've done it for a few years, you really wonder what the problem was.

8. Aug 21, 2011

### twofish-quant

But one thing about finance is that you do think constantly about the deepest and most fundamental questions about the world. How should we structure human society? Who gets what and why? Am I really doing something useful for the world, or is this banking stuff all just nonsense that we would be better off without?

Right now, one of the biggest problems in the world is to figure out what is wrong with the world economy and what we can and should do to fix it. If that isn't a deep and fundamental question then I don't know what is.

9. Aug 21, 2011

### twofish-quant

I got a lot more interested in money once I realized that without money, you aren't going to figure out anything about the sun, the moon, the stars, the elements, and quantum theory.

My career goal has always been to be a starship captain. OK. Maybe I was born too early to pilot the Enterprise, and maybe the laws of physics prevent that, but if you look at 2001: A Space Odyssey, while the predictions for AI might be fundamentally wrong for scientific reasons, the main reason we aren't building moon bases and sending manned probes to Jupiter aren't technological, they are financial and political.

Once I figured that out, then I figured out that in order to get spaceships to Jupiter then I'd better learn a lot about finance and politics.

10. Aug 21, 2011

### OmCheeto

11. Aug 22, 2011

### Fra

You're right, I fully agree.

One quite interesting questions that borderline to politics is, what measure we should optimize. Normally in a free market, everyone maximizes their own beneifts. OTOH, if you are try to maximize in some sense "everybodys" benefit, then one is approaching some of the ideals or Karl Marx I guess, and the standard critique of communism applies: how to ensure that the individual stays motivated.

Or maybe even the way of asking the questions "what measure to we optimise" is the wrong way to ask the question? And in finance, who actually takes responsibility for raising these questions, when everyone are busy maximizing their Own benefits? or your companieis benefits? or your own countries benefit?

Interestingly, this has touching points also with the open foundational issues in physics.

/Fredrik

12. Aug 22, 2011

### turbo

I hate working in sales, and I hate working in business/economics. I built a great business writing and selling applications software for small-business accounting, and I made more money that I'd ever hoped evaluating, presenting, and selling antiques in the field of militaria and firearms. Those were not jobs I had ever aspired to.

I can't imagine working in finance, but the way my head works, it would probably work out just fine.

Anyway, to echo Fra, what do we optimize? We can optimize the profits of a few vs many, but how do we make sure that everybody manages to get a piece of the pie? Shared benefits would not only be beneficial in some respects, but stabilizing. In contrast, I got paid the most when I got the most profit for my clients, which is a pretty stark difference to the view that balance and fairness (however you define those) is beneficial to the society as a whole.

13. Aug 22, 2011

### twofish-quant

Or to put it back into something that is more mathematical, are we dealing with a situation in which you *can* describe as an optimization problem. Let me give an example. Should I be a physicist or an engineer. If you conclude that being a physicist is "better" than everyone should become a physicist, but then if everyone becomes a physicist, then salaries plummet so then it becomes "better" to be an engineer, but if everyone becomes an engineer then......

So in this situation, you really *can't* express things in terms of an optimization problem, now describing when you can decide to make a situation an optimization problem and when you can't, is something that's close to a physics/math problem.

And then there is gaming and anti-gaming. If people know that you are going to do X, then they will act in ways that take advantage of you doing X, which makes it a bad idea to do X. If you have a deterministic algorithm that ends up saying buy stock X and time Y, someone else can come up with a counter algorithm, that insures that they can take advantage of you when you buy stock X and time Y.

I don't think free markets exist except as a mathematical abstraction. There are some situations in which you can describe using the mathematics of free markets (i.e. assume a spherical cow), but you have to be careful to realize that you are dealing with a mathematical abstraction that might or might not be related to reality.

Also define benefit.

Suppose I give pay you a dollar. There is one chance in 100 that you will pay me $100 and 99% that you pay me nothing. Is it beneficial for me to take the bet? Now you will pay me$100 in three weeks. How does that change things? OK, now you don't pay me, but you pay the megacorporation that employs me. How does that change things?

But then you have another problem. Suppose I have the ability to make a bet. Heads I win $X. Tails I lose$X. What is the optimum amount for me to bet. If X=$100,000, then it's a bad bet. If I win, I make a moderate amount of money, but if I lose, then I'm busted. However, if X=$1 billion, then it becomes a tremendously good bet. If I win, then I'm filthy rich, and if I lose, well it doesn't make any difference to me if I lose $100,000 or$1 billion, any besides if I lose $1 billion, you can squeeze all you want, you can't get a$1 billion from me so someone else is going to take the loss.

So what do you do in that situation?

14. Aug 22, 2011

### chiro

That looks like a martingale strategy, and personally I think is a very dangerous idea especially when it comes to something integral like money.

Even though you mentioned in a prior post that people's deposits are guaranteed by law, the fact that the martingale approaches are discussed in finance worries me a little.

15. Aug 22, 2011

### Fra

No I don't think so, but to be more specific I think we do not have a situation where we can find an objective (=observer/gamer independent) optimation problem.

I think the problem is rather best abstraced as an evolving theory of rational actions and expectations, which by itself classifices as a rational expectaion in a theory space (which also evolves).

Anything inferrable are always subjective, this includes odds as well as rules of the game.

My analogy here is that "one player" = one observer. Observer need not be a human, it's generally a physical system interacting with (observing) it's environment.

What would be presumably beneficial to the system is anything that stabilizes or makes it grown and take control of it's own environment. So a system that are successful (or lucky!) in predicting it's own environment, can exploit it and increase it's own confidence(mass).

A CONJECTURE is that a gamer that fails to be rational, are less likely to survive and persist, becauase it will fail to learn from mistakes, and will be eated by it's environment. This is analogous to failure to negotiate with your environment. Yet this does not ban, irrational players, on the contrary is the existence of irrationality critical to evolution and learning. But the irrationality is constrained to small amplitude (just like variation and mutation in biology).The path to rationality is not rational.

Thus an expectation of a equilibrium is that only players that are rational exist. But this doesn't mean that one inside player can measure the rationality of other players or find some way to transform rationalit measures from one player to another one. Instead, even this entire "theory of expectations" is nothing by an expectation in itself, that has to live within other players. At equilibrium many players will "agree" upon the rules. Far from equilibrium there simply may not not even be agreeable rules for agreeing upong disagreement.

I think this is very similar case to physics, where the analogy would be that there is no "fundamental timeless fixed" observer independent law that can be INFERRED by an inside observer. Instead each observer only infers glimpes of this meta theory, which in turns rules their actions.

This is why I think that the most accurate and honest way of think of any economic theory and even physical theory, IS as an "interaction tools" for an observer (or group of observers; read human science). But in general this theory always evolves in unpredictable ways.

In this theory of expectations, then there is power in kwnowing things that your competitor does not. This is the best way to win. And given that knowledge is not static, it becomes an issues of effiency of learning. You need to learn faster and acquire information faster than your environment, or you will get destabilized.

And to undertand howto learn, is exactly IMO what the idea of evolving theory is about. It's a mistake to look for a fundamental theory and fundamental DOF's. I think this holds for both physics and economy.

But so far the implications of such a model in terms of predictions is still open.

The core insight of this is IMO first of all, that we should stop thinking of theories as "descriptions of nature" or as "descriptions of games" when it's not (except in limiting cases of limited validity), it's more proper to think of if as an interacting tool. Thus the description of the game, evolves WITH the game itself. There is no way out of this.

/Fredrik

16. Aug 22, 2011

### Fra

I think those who get to pay should loose their confidence in player in question, and revise their actions so as to make this less likely to happen again.

Of course the damage is already made, but there is no safe games.

One problem is that the public are not aware of the risks involved. You put your money in the bank and think they are safe (you even expect them to grow). Otoh, there are risks of everything. I think we may need to accept that sometimes things don't always go up. As long as we don't get knocked, we will learn.

Another problem is the laws that _allows_ speculation (ie allows high profites by high risk actions) but WHEN luck changes, the tax payers should pay. That just isn't right. I think this will change, thanks to the problems. If we don't get it sooner, maybe it takes a financial crisist to align our heads.

/Fredrik

17. Aug 22, 2011

### twofish-quant

One thing that has tended to happened to be is that I try to avoid abstracting the situation. Instead of coming up with a general theory of finance, what I end up doing is to be very concrete. We have a game that's played by N people, one of whom is named Fred.

That really depends on the specific environment. There are a lot of specific situations in which it is rational to be irrational. Also equilibrium is not a good assumption.

I actually don't think so. One of the things that I like about my job is that I have very strong pressures to avoid vague and abstract theories that don't make money (of course vague and abstract theories that do make money are quite welcome).

The reason I distrust the idea of a "vague general theory that evolves in unpredictable ways" is that it just complicates things with no real benefit. As a practical matter, I don't think that a general theory of finance or economics exists, which is to say that if one did exist that it would be useless for doing anything useful with.

Or maybe not. Sometimes dumb strategies work pretty damn well. You actually end up doing pretty good in the stock market if you just tape a newspaper to a blackboard and through darts at it. One of the funny things is that when people ask me for stock advice, what I generally tell people is to go buy an index fund, and don't watch the news since for most small investors watching the financial news is worse than useless. It turns out that for small investors (i.e. anyone with less than \$500,000), what kills you is transaction costs, so the value in being in touch with the markets is outweighed by the money and stress you go at thinking about what is going on.

Curiously enough there are some equations that assume randomness in the markets because if you could figure out the markets by thinking about it, those equations wouldn't work.

18. Aug 22, 2011

### twofish-quant

The problem here is that the people that are paying aren't sure who to blame.

Personally, I'm not sure that that in some situations the public can be or should be aware of the risks involved. If you make writing a check a crap shoot, then it becomes difficult/impossible to conduct even routine financial transactions.

Also, you put your money in an FDIC bank and it is safe. If the bank goes under, then the Federal government will pay, and if it doesn't then you can join your fellows in the ensuing riot.

It's not "not going up" that's the problem. I find that people have naive ideas of what happens in banks. People sort of assume that there is this back room and safe with gold bars or green slips of paper, and that's where their money is. It turns out that that's not how it works, and thinking that it works this way gives people a wildly false sense of security. You look at your banks statement, see some numbers, and people assume that when they put their ATM card into the ATM machine that some truck roles up with numbers that correspond to the bank statement. So people think that no matter what happens, you still have trucks full of cash or gold whatever happens.

But money is an social illusion. Have the wrong thing happen, and all those numbers in the bank statement mean nothing. One reason I'm not too supportive of "tough love" measures is that people that advocate "tough love" tend to assume that other people are going to get hosed.

"What is money?" is one of those deceptively easy questions like "what is time?" or "what is gravity?" Personally, I'm more confused about what money is than most people, just like I'm more confused about what time and gravity are than most people.

And then there are innocent third parties. In this other thread you have physics Ph.D.'s that can't find jobs because the economy stinks. What do they learn? What's the lesson here? Don't do a Ph.D. because the world financial system might collapse?

It's actually much more complicated because you are dealing with multiple laws in multiple countries, with plenty of different ways of moving things between countries, and a lot of incentives not to change things except under extreme examples.

It's the "Las Vegas" effect. If you have laws that forbid gambling, the one place that doesn't makes a ton of money. Ever wonder why credit card companies are located in South Dakota?

And things get even messier when you talk about legal interactions.

One of my favorite fun law examples is that Great Britain very heavily regulated buying of securities, but you can sell anything you want. Germany, very heavily regulated selling of securities, but you can buy anything that you want. So someone got the bright idea of having an company in London sell stuff to the Germans.

And then there are other factors. People have really short attention spans. Do you know anyone that has spent the last several months going to every committee hearing and studying every draft proposal on banking that comes out? I do, but it's people that are in the industry.

If you are not financially affected by legal rules, then you aren't going to put in the time and effort to understand what is going on, and "moral outrage" quickly gets pointed at the next train wreck.

19. Aug 22, 2011

### Fra

That's fair enough.

What I meant was in the context of comparing foundational questions in social and economical systems and it's connections to foundational physics, in particular how you understand what a theory is, as an intellectual quest.

Everyday business will continue as usual, and I supposed I'm fortunate to be able to allow myself mental masturbation at times :)

/Fredrik

20. Aug 22, 2011

### twofish-quant

It's different from a martingale strategy. It's one consequence of a limited liability corporation, that you can't go below zero. The problem is that the rational thing to do is to flip the coin. Also it gets worse when you have a lot of anonymous people that have access to the coin.

It should worry you a lot. Also people mention this because it's the "moral hazard" problem, and people think about a lot because it's a bad thing, and there is a lot of thinking about how to stop it from happening.