Financial Modellers’ Manifesto

Emanuel Derman and Paul Wilmott The Financial Modelers’ Manifesto January 8, 2009

This article points out some of the consequences of applying mathematics to finance in the way that mainstream economists and financiers often do, without regard to its validity. It commends:

The Modelers’ Hippocratic Oath

~ I will remember that I didn’t make the world, and it doesn’t satisfy my equations.
~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.
~ I will never sacrifice reality for elegance without explaining why I have done so.
~ Nor will I give the people who use my model false comfort about its accuracy.  Instead, I will make explicit its assumptions and oversights.
~ I understand that my work may have enormous effects on society and the economy,  many of them beyond my comprehension.

Generalisation

One could obviously apply the oath much more widely. But models can only ever be models of some context, so one has to be wary lest the decisions based on the models alter the context, which they often do. It is not just that the effects may be beyond the comprehension of the modeller: most methods exclude from their scope the potential impact of decisions that have yet to be made.

It seems to me that rather than abide by the oath, the modeller needs to be clear about the proper scope of the model. If it is to inform as yet to be made decisions then ideally it would include all possibilities, but it can only include the possibilities envisaged by the modeller, and may not even include all of those. The user of any such model needs to be clear about the scope of the model, particularly where their actions may affect factors that the modeller is unaware of or has otherwise not included.

An alternative Oath

There perhaps needs to be  a joint modeller-user oat: To collaborate to ensure an adequate mutual understanding. (This is often sadly lacking.)

Dave Marsay

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