August 21st, 2010, 12:35 pm
QuoteOriginally posted by: crmorcomQuoteOriginally posted by: Traden4AlphaPart of me agrees with you, farmer, that the density of Ayache's writings does a disservice to his presumed goal of reaching (and teaching) a broader audience who should listen to his ideas in the context of quantitative finance, market regulation, and economics. Yet I don't think we should confuse style with substance and would hope that we could discuss content, rather than form.Though one cannot separate them reliably, the form does matter for the content - certainly at the extremes. Reading the blurb or the 8 pages that Amazon reproduces, it is virtually impossible to understand what the point of the book is. It has a level of form obscuring function that I have almost never seen before. That is a problem - particularly if Ayache expects me to pay $29.16 and spend hours of my time reading 496 pages.So, a question for you: in one or two paragraphs, what do you understand the content to be? And what, in intelligibly concrete terms, does Ayache add to the debate about economics?That's a very very good question, crmorcom, that I doubt I can answer because I have yet to read the book. From other writings by Ayache (which seem to paraphrase or introduce ideas from the book), I would say that some of his main points (muddled by my explanations) include:1) contingency (real uncertainty about the world) takes primacy over the current model of enumerating states and weighting those states by probability. We can never directly observe probability at the unit-event level (e.g., a AAA bond can default and yet still be properly AAA). Probability only has meaning at a population level and then only by making the dangerous assumption that the unit belongs to some unchanging invariant class of entities or events (e.g., all AAA bonds are alike in the past, present, and future)2) the notion of price (as a source of new information) contradicts the notion of replication of derivatives. If a derivative can be replicated (or even hedged) from other instruments, then its price is redundant and has no meaning. If the price has meaning (i.e., a discrepancy between the derivative price and the price computed form the underlyings), then the replication must be flawed.3) Current methods contain the false notion that if the difference between today and yesterday displays certain properties, then the transition between today and tomorrow will have those same (or very similar) properties. I suspect Ayache sees contingency operating over time -- tomorrow is simply different from today and the many people, banks, funds, and sovereigns have lost lots of money not understanding that the trend is not your friend and that the non-occurrence of certain events in all our yesterdays does not imply the impossibility of the event in our futures (e.g. housing pricing can only go up).In general, I get the sense that Ayache wishes to replace the use of probability theory in our understanding of prices and markets with a much more general theory of contingent claims in markets. This theory would avoid many of the problematic (and empirically false) assumptions and dodgy metaphysics of associating the abstract notion of a probability with a concrete event or instrument. But Ayache would not discard all we know. He'd still use non-arbitrage, for example, but probability theory would be out.I too have trouble with Ayache's style. At some level, he wrote a graduate-level work of philosophy with much discussion of the nature of existence, being, necessity, etc. and with reference to other philosophers as if the reader knew those philosophers intimately. His work may be focused on quant-financial matters, but his methods and style draw on the philosopher's toolbox of intricate arguments, deep excursions into meaning, extremely intentional (sometimes idiosyncratic) definitions of terms, complex counterfactuals, and the presumption that the reader knows the literature. Just as a master-philosopher might find a graduate-level quant finance book to be inscrutable, so, too, a master-quant might find a graduate-level philosophy book to be inscrutable. I think Ayache's choice of style is most unfortunate because the people that really need to read Ayache are master-quants, not master-philosophers
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Traden4Alpha on August 20th, 2010, 10:00 pm, edited 1 time in total.