#Quora: How can Renaissance Technologies make so much money from financial markets by hiring scientists/mathematicians with no domain knowledge o…

How can Renaissance Technologies make so much money from financial markets by hiring scientists/m… by Laurent Bernut

Answer by Laurent Bernut:

I have never worked at Renaissance, so please take my answer with a grain of salt, but here is a first hand story that could shed some light.

Red OctoberOn June 22nd in NYC, my colleague, who is also ex-US Department of Defense consultant and myself, met with one of the foremost US experts on sonar detection (good luck finding him on Facebook, LinkedIn). He is a physicist with multiple PHDs, geeky funny. His expertise is signal processing. He is the real “Hunt for Red October”.

It was one of the most refreshing experiences ever. He explained his world. I explained mine. Cotes de Provence Rose, beer and wild berry Zinfandel helping, we tumbled down the rabbit hole talking even about epistemology, the philosophy behind math.

His world, signal processing, bears uncanny resemblances with ours. We explored Bayesian probabilistic determinism, which models (Gauss, Poisson etc) to apply to distributions, the cost of false positives (think trading edge), arbitrage between time and action with sparse data (confirmation). We spoke the same language. We were talking real problems: how do distinguish signal from the noise ? How fast ? What is the cost of being wrong ? What is the cost of being right ? Which statistical law applies to randomness ?

We entered a massive time distortion. We started around 2 pm and a couple of bottles down the road, but then after what seemed like 5 minutes, we were hungry. It was 10 pm. We could have gone on forever (*)

Compare this with glorified journalists, otherwise referred to as fundamental analysts.

  • “This is fairly valued”… life is unfair darling, so do you really think markets are fair ?
  • “On a sum of the parts valuation”… Frank N. Stein zombie valuation
  • “Fundamentals are strong”… Make fundamentals great again…
  • “Long term story is still intact”… Some HF reality TV celeb says that about Valeant by the way…
  • “On a DCF basis, our target price is +10% above current market valuation” … stop tinkering the terminal value to rationalise your subjective views
  • “i think there is 80% chance that” … bad arithmetic meets emotional roller coaster
  • “top quality management” … was also said about Enron, Bear Sterns, Kodak, GM, Chrysler, Valeant

Too much B/S bingo, too much theory,

Bottom line: “In theory, theory and practice are the same. In practice, they are not”. Yogi Berra, Yankee philosopher

Physicists approach the markets as a statistical problem. This is practical.

MBAs have too much untested theories in their head. It is costly and time consuming to unlearn all that junk.

 

(*) There is no way i could ever afford someone of that caliber; he charges something the size of Liberia’s national deficit per hour. But, he wants to send his granddaughter to Mars and he thinks our algo could be the right fuel, so we invited him to have fun with us. Maybe good guys do not always finish last…

How can Renaissance Technologies make so much money from financial markets by hiring scientists/mathematicians with no domain knowledge o…

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