Engineering + Finance = Financial Engineering
The above equation is true, however, what the equation does'nt impress upon is the fact that you are combining two age old disciplines (okay, maybe modern finance is not that old) to produce innovation in a whole new field.
Someone at the panel said the other day that engineering makes a detailed analysis of a physical system and then adds on it a huge factor of safety. This is not so in finance, where values to the last digit could (and are) very significant.
In a way, this exact-ness is what appeals to me about quant finance. There is no room for hand waving - a security is priced according to a model and its underlying assumptions. Period. No BS. On the other hand, engineering seems to be moving into the hand-waving domain (with safety factors and other such CYA strategies). Finance is moving to from the other end of the spectrum (from obscure valuation models, M&A) to the "exact" side (pricing, securitization).
Ironic? Well, maybe so.. but it is refreshing.
Someone at the panel said the other day that engineering makes a detailed analysis of a physical system and then adds on it a huge factor of safety. This is not so in finance, where values to the last digit could (and are) very significant.
In a way, this exact-ness is what appeals to me about quant finance. There is no room for hand waving - a security is priced according to a model and its underlying assumptions. Period. No BS. On the other hand, engineering seems to be moving into the hand-waving domain (with safety factors and other such CYA strategies). Finance is moving to from the other end of the spectrum (from obscure valuation models, M&A) to the "exact" side (pricing, securitization).
Ironic? Well, maybe so.. but it is refreshing.
posted by Quantjock at 10:48 AM
2 Comments:
not sure if i agree...just starting out in mathfin myself (and keeping a blog) but my impression is that there is a lot of intuition that goes into pricing... certainly you can plug in parameters and get an exact answer but does it make sense?
also, the assumptions are sometimes pretty heavy (e.g. gaussian...) and yet the answers are still good enough.
I agree about the intuition part. You have to know the model's assumptions and its limitations, inside out. And have a good feel for the factors driving the model.
Hey, what do I know.. I am just starting out :)
Nice blog btw.. its good to see some more finengineers out there blogging.
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