Ali’s blog

Mostly quant stuff with occasional digressions

Why Financial Engineering Doesn’t Work

Posted by alifinmath on January 13, 2008

Read this article, and take care to digest it carefully:

The last quarter century has seen the explosion of a profession, financial engineering, that has provided innumerable lucrative opportunities for otherwise indigent mathematicians — it was thus welcomed by a former mathematician like myself! Nevertheless the turbulence in the bond markets in the last couple of months, at a time when the world economy’s prospects seemed set fair, have exposed a guilty secret of the financial engineering profession: its methods don’t work.

Financial engineering’s benefit to the global economy is questionable at best and the increases it has produced in the financial services sector’s share of global output may have been mere successful rent seeking. In the long run, less opulent compensation for financial engineers, more aggressive audit and supervision policies for financial institutions’ engineered assets and a healthy cynicism about financial engineering in general may put this genie at least half way back into its bottle. That is likely to prove a positive development.

It goes without saying that I heartily concur.

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