More quants, please
In 2008, the reputation of mathematicians in the financial sector had certainly taken a beating. Some of the blame for the crisis was put at their doors: they had used their formulas and algorithms to create complex financial products, which nobody properly understood. At the time, it was all too easy to call for quants to be banned from all financial districts. But that did not happen. Nearly a decade later, they are more in demand than ever. 95 per cent of all financial mathematicians at TU Delft go straight into employment after graduating. However, there is no need to fear this new generation of quants.
An interview with Pasquale Cirillo, coordinator of the Financial Engineering Specialization of the Master Applied Mathematics at TU Delft, about the rising popularity of financial master – and minor – tracks at TU Delft, and why we cannot apply exact sciences in the financial sector ‘just like that’.
Why do we precisely need these young, new quants in the financial sector?
If you ask me, the crisis has shown that instead of demanding less quants, we in fact need more – and better – quants in the financial sector. In the past, too many people just played the role of quants, that is experts in the quantitative analysis of markets. The financial sector was populated by lots of bright exact scientists, like physicists or civil engineers, who thought that they could directly apply their mathematical knowledge to finance. However the financial sector does not revolve around mechanistic forces of nature, it is all about people. And people have emotions:
We need to train a group of quants that are financial engineers; who genuinely understand mathematics and computational science, who are able to apply theory, calculate risks – common, uncommon and extreme risks – and above all, keep both feet firmly on the ground, instead of being high up in an ivory tower.
they can be very intelligent, and they can also suddenly do something very stupid out of fear. There is no mechanistic model that can forecast such factors. That is why in the financial world, we do not only need people with sound theoretical mathematical expertise, we also need people that are humble, and aware of the limitations of their knowledge.
So you teach these students to be humble; that there are limitations to their knowledge?
In my lectures I always devote a great deal of time to explaining a certain model and the assumptions and hypotheses behind. I then spend just as much time discrediting the very same model, explaining why the model only works in certain situations. I ask students to deliberately model physical and non-physical processes, so that they can experience the differences for themselves. You see, a financial model falls into the second category: it exists, has a huge impact on our lives, but it is not tangible. You see the effect, but not the object. Even when you do see the object – as in a transaction – the response is unpredictable, as you are dealing with human actions. And people introduce their emotions, political preferences and own ideas into the process. An object’s value is relative. Right now, you would not swap your smartphone for a litre of water. But lost in the desert, chances are that you would. While the chemical substance remains the same: H2O.
What is the focus on at TU Delft?
At TU Delft, we offer financial courses that combine high-level mathematics, statistics, economics and business heuristics. We educate problem solvers who are able to apply and adapt the theory that they have learned in practice, on daily business problems. Students learn all the tools they need to be effective and competitive financial engineers. Here at TU Delft, we also offer two financial minors. One of these is open to students from all degree programmes. This is one of the most popular minors at TU Delft. The second minor was developed especially for students in quant faculties: the faculties with a large amount of mathematics in the curriculum, like Civil Engineering or Physics. After completing this minor, students can be admitted to the Financial Engineering specialization of the Master in Applied Mathematics. Because, like I said, a civil engineer may have no problem constructing a bridge that can stand the forces of nature, but in order to apply mathematical models in the financial sector, you need to be really good at calculating human-driven risks, i.e. uncommon , extreme and unpredictable risks caused by human actions.
What type of student were you?
As a student, I always wanted to know everything in advance. I sifted through the entire curriculum and knew everything about the courses and the lecturers. I now recommend that my students do the exact opposite. This morning, a student asked me which electives he should choose with a certain position at a bank in mind. I told him that he was working from the wrong starting point. He now has his heart set on a certain position, but in two years’ time, it is likely that he will prefer the sound of something else entirely. Indeed, the position may not even exist in two years’ time. At least he’s in the right place. As a student, you need to take advantage of all the knowledge that is imparted to you, and be flexible. Finance is a very broad field, as is mathematics where you can find geometry, algebra, analysis, logic, and so on. In the first semester, we teach students the basics. In the second semester, we move onto the various flavours of finance. Students are given the opportunity to discover what they enjoy for themselves. That may be programming and developing algorithms for financial transactions, calculating risks, building new financial products and pricing them, the flavour palette is extremely broad.
Is the financial sector different now to when you were a student yourself?
We now have financial products that did not exist a few years ago, like correlation swaps, and products like CDOs that are much less fashionable than before. And consider online transactions, for example, that is really something that has emerged in the last couple of decades. In the 1990s, people were literally standing on the trading floor, screaming to make a transaction. And now, it is so quiet that you could hear a pin drop. Everything is digital, and the competition is almost physically tangible. Everyone wants to have their servers as close to the stock exchange as possible, because it comes down to nanoseconds. It is a completely different world. That is why there is now so much emphasis on computational science in the curriculum. How the financial sector works has also changed. A financial analyst used to focus on looking for errors in the market, the so-called arbitrage spots, but now, everything is coordinated. It is impossible to buy the same share at two places at two different prices. This demands more efficient algorithms for quick decisions. You now need to anticipate people’s and computers’ behaviour – whether they will buy or sell – in as far as that is possible. The focus has shifted. And financial risks are much bigger and more difficult to hedge nowadays, because of the complexity of the markets. It is a fascinating world.
Why would you suggest to enter this field?
As a scientist, you can study the hydrodynamics of a river, biology, or astronomy. Those are, for sure, relevant and fascinating fields. However, the stars do not need our help to keep moving. Without people, the economy will grind to a halt. We are the economy, we are the markets. In Europe, there is a whole range of programmes in finance, but only a few institutes offer financial engineering. I would like to see that change: we need to go beyond the old toy models of old-school finance, we need to combine financial mathematics, statistics, computational sciences and business heuristics as the ingredients of a new recipe. It will not be long before Artificial Intelligence makes its entry into the financial market, we need people with actual intelligence to be able to work with that. We need to fight to be still the intelligent ones on the markets.