Paul Wilmott Has Some Feelings About Quantitative Models

written numerous books on UH, textbooks on quantitative finance. He has helped create the certificate UH for Finance UH quant Work. And he has just been absolutely on the forefront of identifying what's wrong with financial models, markets, derivatives, risk taking. There are there are a few people who understood why the financial crisis of oh an O nine was coming UH more specifically and earlier than he did. Eight years in advance. He was warning, Hey, these models are really

problematic and and they're going to result in in big problems. Um, They're gonna result in real issues. And he turned out to be not only right generally, but what he was criticizing specifically, turned out to be a large part of of why markets and credit went went through its collapse. So, with no further ado, here is my conversation with Paul Wilmot. I have an extra special guest. His name is Paul Wilmot.

How do I describe him? He is a expert in quantitative finance, a researcher and author, a consultant, the professor. He has written over a hundred research papers on mathematics and finance, several best selling and some would say groundbreaking textbooks. He runs what is the biggest quantitative analysis website in the world. Uh no, lesser a critic than seemed to Leb described him as the smartest quant in the world, the only one who truly understands what's going on, who

uses his head and has a sense of ethics. Paul Wilmot, Welcome to Bloomberg. Hi, it's a place to be here. I have to correct you already. I have to correct you. I'm not, and never have been, a professor. I'm a mere doctor. I'm afraid were you a lecturer? I've been. I've had all sorts of research positions in universities, but never reached that exalted. I'll tell you why I drew that conclusion. There is a YouTube video of you describing some of the chapters of some of your textbooks, and

you just have a natural professorial air. I have this thing, and I through the assumption that I perhaps should not have drawn. So let's talk a little bit about um, your research, your work you're writing. I have to start out with a quote of yours from one of your papers. The paper published in two thousand was the Use, Misuse and Abuse of Mathematics and Finance. That title alone is a good place to start. But here's the quote that

was so prescient. It's clear that a major rethink is desperately required if the world is to avoid a mathematician led market meltdown. That is pretty much dead on. And seven years later we had the quant crash, and a year after that we had the full blown Great Financial Crisis. What were you looking at that gave you such a clear understanding of of the coming storm? Well, I also a few years after that, I wrote that I did specify that I thought it was going to be credit

datives that might be the problem. So even more specific, yes, and that that's because of my background, I haven't taken the classical quant route, and I come with a lot of skepticism, and I'm not a great fan of following the herd. So whenever I look at mathematical models, I can pretty much tell you whether the based on any reality, or maybe whether there's any dangers involved with the the hedging or the valuation. And everywhere I looked, I just

saw that there were dangers. It was not The models for equities are not too bad in quantitative fires. The models for interest rates are pretty bad, except interest rates don't really do much, certainly at the moment anyway. But credit the models are not only the models really really bad in terms of not matching reality and how they use,

but also credit markets are absolute enormous, tremendous. In fact, that also from the same paper, the underlying assumptions of financial models, such as the importance of normal distribution, the elimination of risk, measurable correlations, etcetera, are all incorrect. And and when I read that, I was reminded of the famous George Box quote all models are wrong, but some are useful. And I know that's sort of a bastardization of of what he really was intended. But the natural

quote next question is are all models wrong? And how can you tell the ones that are useful from the ones that are dangerous? Well, models in finance are going to be wrong, and it's a definition you can you can perfectly understand what's not told. Um. And as for the word useful, I think you have to ask what is meant by useful and the various ways of looking at this useful. Are they useful in helping you control risk? Are they helpful in allowing you to do more business?

Or there are all sorts of different angles, and some of these are sort of conflict with what the man in the street might want. For example, a model might be useful because it's great for marketing, and it you know, it fools the regulators and it's not very good, but hey, it's it's useful if you want to try and start a really big hedge fund. Um. So it depends what you mean. I don't think that's what professor Box was

referring exactly. However, exactly, they certainly have conserved useful purposes, albeit perhaps not accurately predicting what the universe may look like exactly. So you hope that when we talk about having a model. It's useful, you'd you'd like to think in terms of, oh, it allows us to manage our risk or hedge our risk something like that, or or produce important new products that are helpful in hedging your business or whatever. But I'm a bit too cynical to

think of. So you said you didn't take the usual route into quantitative finance. How what was your route? How did you find your way into quant finance and how does that differ from the typical on Wall Street. Well, you have to go back to my my my childhood. Really, I've always from a very young age run my own businesses at various sizes, and even when I was a mathematician at university doing my doctorate or doing post doctoral work, I was always interacting with the real world, trying to

do consultancy, etcetera. And it meant that I saw a lot of different problems from fields outside of finance. In fact, when I started in finance in the late eighties, before that, I didn't even know there was any mathematics in finance. But I'd work for are anautical companies, for steel companies, for all sorts of different businesses where you try and take a physical problem and turn into into something mathematical. And then a colleague introduced me to these things called options.

This was in the there was actually just before the seven crash, and just looking into the literature, I found, hey, there's there's real mathematics involved in in in derivatives. And so I started just to apply the same principles of mathematical modeling too derivatives as I had to all these other real world physical processes that I had worked on. Actually, the when I first saw the famous Black Shoals equation, UM, I thought, this is this is great. This is just

like second year undergraduate mathematics. UM. These days apparently you're supposed to have a PhD. But actually that's that's a that's a lot of nonsense. UM. Most quant finances just second year undergraduate maths. Some of the book is really quite fascinating, and you start out with a history of investment theory, and I thought, skipping from the south Sea Bubble to Adam Smith to the efficient market hypothesis, what is the connective tissue between all three of those major

events in the history of finance. Well, when I think you start to see is some going from just people's personal experience through too trying to lay down some principles and then trying to quantify those principles. So up to the period now, the modern era, when pretty much everything in finance is all quantified, everything is in terms of expected returns and volatility and quantities like that, it could

be reduced to mathematical models. Everything has become mathematics. Yes, right, So so then I always thought of the random walk theory as a sort of squishy psychological claim that hey, you know some maybe some people can beat the market, but you're probably not one of them, and you probably can't pick them. And then once we bring in taxes and costs and everything else, you're better off just indexing. But you relate the whole concept of random walk to

probability theory. What ties these two together? Well, if you go back to the different types of analysis that people do in in finance, you've got fundamental analysis, which is about trying to figure out, by looking at the company report, company's reports and the directors, et cetera, the product, how much is this company really worth? Now, that's very difficult to do that, That's a lot of analysis is required. Um,

I mean, can you read balance sheets? I can't read balance sheets for exactly exactly so, but the real problem is is that you're not trying to predict what the the the market value of the company should be, because you're trying to predict what other people the people are buying certain shares, think those famous beauty exactly. So that you move on to fundamental that sorry, move on from fundamental to technical analysis, which is exact opposite, which is

really easy. You draw a chart to some trend lines and some patterns. Problem is that sort of thing, statistically speaking, doesn't work. The scientific evidence suggested the vast majority of that doesn't work. So the great break through the fifties six seventies was to say, let's throw that away. Let's just say we can't predict things. We've got the concept of the efficient market hypothesis as a background for this, but let's just say it's like tossing a coin. Now,

is it a tossing a biased coin? What's the chance of heads, what's the chance of tail? So you put numbers to these probabilities and the sort of from that we get lots of theories about derivatives valuation. And once you've got derivatives, you can value derivatives, you can create new instruments, and the new instruments what might require new math, new mathematics. So you have this snowballing effect where you've got the mathematics increasing and the number and type of

products similtarency increasing. So there's a quote in the book I really like, and I'm going to mangle this a little bit. No investment strategy based on mainstream finance theory can protect protect investors from market wide crashes. First, is anyone really suggesting, Hey, our strategy is going to protect you? Is that? I guess that's naive of me to uh to ask. But do people really believe, oh, here's the magic seven like portfolio insurance that will protect us. I'm

sure there are some things you can do. Um, there are all sorts of nuances here. I remember Nassy, my dear pal, Nassim Talent, telling me about his um the way he pitches this this idea, and that is to say, it's insurance. But it's not a portfile, it's not an investment. It's insurance. You're gonna lose money. In fact, you hope you'll lose money because if you make money on this insurance is because your house has burnt down, which you

don't want to have happened. So that's quite that's a psychological way of looking at this, getting the putting in place, the the the protection as a as a as a cost rather as an investment. Um. There are some things

you can do. Of course, the famous portfolio dynamic portfoileon insurance of the of the eighties was it was a classic example of a feedback effect, the positive feedback effect, that the the very action of trying to protect your portfolio is what caused made which is a beautiful concept. What what I don't understand is who thought, oh, if the market is crashing, I'll go out and buy some pots and that will protect me. Summing it up that way,

how did anybody think that that model was valid? And granted there's a little hindsight bias here, but still it sounds so obvious after the fact that that would not work, right. I don't know. I don't know the I think the I think in all of this that a key thing you've always got to remember is that the psychology of the markets and that whatever the mathematical models say, somehow human beings in this particular field do try to do manage to mess up the models. So here's another mangled quote.

Bankers offering complex financial products don't always understand the risks, and that when a bank goes bust, stock markets collapse, house prices tumble, it's your bank account, your shares, and your home equity that suffers. Right, Well, it's certainly true in my experience that bankers and especially regulators, I have to say, I do not know as much as they ought to. Um, if they were doctors and they didn't know, you know, bleachers do a little bleeding exactly, or you

know which side is the heart? Aren't you know that sort of thing, then they be lawsuits flying. But bankers, in my experience, there's a lot of herd mentality within bankers and that works for them. That's how that's how they make money is from from pretending there are no risks and although they may deep down they may realize there are risks. And regulators I haven't met that many regulators.

I don't seem to bump into them very often, maybe because the things I've said about them in the past, but my experience is often they're very good at book learning. You know, they've they've got that they've read the math books. They know the models, but they're sorely lacking in street smarts in my experience, so they don't really understand how

the world works. So you have in the past suggested a solution to the problem of both bankers that don't understand risk and regulators that don't know how to regulate it is a tobin tax on each transaction, a point zero zero eight percent tax on any buy sell, any trade whatsoever. And how would that work and how would that protect markets? You're very good with your numbers. The the idea of the Tobin tax is to stop very high frequency trading because, uh, you then lose with the

high frequency. The problem with one of the problems with high frequency trading is that you lose the connection between the value of a share company and the price. It just becomes about, you know, the these these some time series of numbers, and it could be anything. It doesn't matter. But there's a company here and there are people whose

jobs on the line. Let's talk a little bit about the time you spent at Kayasa Capital Capital two people separated by a common language, So you were a founding partner of the volatility arbitrage hedge funds, which was running about two million dollars just on the two million and so, so tell us a little bit about volatility arbitrage, which is sort of ironic in these days of almost no volatility.

It's interesting that that it's very difficult I find I found to predict the direction a stock is going to go up put down. But it seems to be easier and there are statistical reasons for this, actually, but it seems to be easier to to forecast volatility. How much noise there in there is in a stock. So you put a counterintuitive though, that it's harder to find the

signal and to use you the noise. Yes, I can see that, but at the same time, you can see what the market is sort of thinking volatility is because options, the valuation of options hinges upon estimation of volatility. So you can say, oh, here's a core option, what volatility are they plugging into? The famous black shows formed to give that that price that you see in the market, and so you can you can back out a thing called implied volatility, which is sort of a bit like

what the market thinks. So you look around for when is the implied volatility different sufficiently different? From your forecast volatility and if they're different, and if you just happen to be right, then you can make some money. So that complex it's it's the purest sort of volatility arbitrage. I'm betting my forecasts against the markets forecasts essentially is what is what it amounts to? So in not so efficient market, not so efficient, not so efficient. I don't

think believes in efficient markets. Who's listening to this program to UM? I think there are a decent number. It's it's a really interesting point because I think there are a number of people who say, um. Look, cliff as Nests, who runs a q R Gene Fama was his PhD dissertation advisor and Fama's credit. He said, hey, if you want to go out and prove factors work, I'll I'm happy with that. So we know the market is kind of a sort of mostly eventually efficient. Is that? Is

that a fair way to describe it? Not necessarily. It depends where there's any mechanism for for removing any efficiency. People just say oh that, you know, people say things like the markets always right, and well, we know that's certainly not How how could the market be twenty three percent lower the day after the crash. Was it right the day before? Was it right the day after? Is it wrong both times? It's kind of hard to say

the market is always right right. Well. One then example I I sometimes give my students is about uses the idea of car insurance. For example, suppose you've got a twenty thousand dollar car and your annual car insurance is let's new simple numbers a thousand dollars. A quant would say, oh, it's a twenty thousand dollar car. It's a thousand dollar car in shoans are that means must be a five

percent chance of crashing. And because they're missing out from that five fence the fact that the insurance company needs to make a profit, I'm not doing things all sorts of things. So so the way your typical quant or um Chicago finance professor looks at things is in a very pure way that sort of misses all the fun. What I think, and as I've said before, I've been running businesses since I was a child, virtually, and the

business side of things is what makes things interesting. And so when we approach this sort of going back to volatility arbitrage, you'd be amazed at if you look at the literature. The there must be tens of thousands of papers which talk about how to how to back out from from market prices, what the implied vault inty is, and how they assume that the implied volatility is right, that the market knows, the market has a crystal ball, it knows what vaults is going to be. Must be

tens of thousands. How many papers are there which say, well, you know what, what if the market is wrong and the volatility, the real volatility is different from implied volatility, how can you make money? Then that's the underlying strategy, that said Catholic. That must must be half a dozen papers, and surely that's the most important thing. We've got an option. The question is what am I going to do with this?

I could hedge with it, or I could make money from it, and then just half a dozen papers on how to make money. So so, how did the hedge fund do? The hedge fund was did did wonderfully for it's its lifespan of three years, which I believe is is the average lifespan of a hedge fund. And and so at the end of the three years, you basically tapped out and said I'm going to go back to writing. Well, I I learned a lot from that that hedge fund, a lot of things about not just about hedge funds,

but also about about myself. I found that very interesting because the Hedgeman was based in New York um and where were you located was located in London, so there was this five hour time difference, and just as things were getting interested New York was when I was sitting down to dinner or onting to go to bed or something like that. So that was kind of frustrating. Let's

talk about the Wilmot business model. So you run the website, you have a print magazine, you have a Paul and Dominic quant recruitment, the book, which we all know is books or giant money makers. What is your business model as quant expert. Well that the Poul and Dominics doesn't exist anymore. That's but the and also there was the we talked about the world's largest quant website. It's also apparently the world's most expensive magazine. I've been told. I

don't know that's true or what's the magazine costs. It's not six hundred dollars for six issues. I don't think that's terribly expensive, and I looked it up. It's not actually this And if you look at some of the like the medical journals and stuff, these are thousands of In fact, there was a big article not too long ago about what used to be academic research now sells for thousands of dollars and there's two companies that have sucked up all these formally free publication. And that that

was a quote from Esquire magazine. So I'd just like to repeat that it's not very useful in marketing, though there was until recently, well there still is. The Certificate and Quantitative Finance that that is is the world's largest high level quant education with a company called seven City. This CQF was was founded with a company called seven City Learning two thousands three was it. But it was sold up to Fitch about three or four years. So,

but what is the business model? The business model, Well, my whole business model all my life has been do something which is fun and then and then I accidentally or I always have this urge to turn things into into businesses. It's not a it's not a greed thing. It's an enthusiasm. Think. It's almost like I've got some hobby. I'd like to make it public. It becomes more long

last thing and sustainable if there's a revenue stream behind it. Yeah, I don't think of it like that, you know, it's just sort of is something in my DNA that says, you know, for example, I've started to learn the ukulele a few years ago, and I just know sometime in my life there will be a time when I'm on a stage and people are paying money to listen to me play the ukule I'm going to take the other side of that trade. You should hedge that bet because

I don't see that happen. No, No, like, yeah, I'm pretty good, I'm getting I'm getting that, I'm getting. No, it's not. It has to do with your skill set. It has to do with the demand ukulele. Before you'd be surprised. I would be surprised. It is the instrument. All the schools are taking up ukule because it's I'm on the other side of that trade. Also, what did

you learn at school? Trombone and piano. I want to do the trombone, but they would hate it the trombone because at least the piano there's a distinct key for each note the trombone. As a ten year old, you have to have an year, no when you're more or less. And I had a pretty good year, but not that good. But they at schools in the UK, at least they

traditionally learned the recorder. You know, three we all did that, okay, But now the ukulele is replacing the recorder because really because it's it's easier, you know, you can really really ten minutes. I should have brought it. I'm sorry you didn't. That would have been next time, next time. Why do we get into this business models? Right, you're gonna you're gonna monetize ukulele and performance. But but I've always been like that, and so I've going back to the late eighties.

I was doing some research with with colleagues at university and we thought, let's let's why do we give some courses on teach people in the city, and they just was phenomenally successful. So we set up a business which and then and then we turn into a book and it was it was suggested, why don't we self published this book? So rather than just could hand the book over to a publisher, we actually published it in printing, etcetera. And and my mother and my stepfather were in charge

of sales. So my poor mother. We we put in the advertising. We'd say twenty four hour facts hotline, um, so her phone would be ringing. And how did the book sell? Oh? Incredibly well it was. It was. It was just unbelievably considered. We did hardly any advertising. This is before Amazon. It did it incredibly well by word of mouth and even before the book came out, people

talking about it. People I think the things. People were paying something like tund fifty dollars for a hard copy that you had to cut and paste the pictures into the text. And I don't mean cutting paste like you do, you know with the with the mouse, physically scissors and glue. So they would get two piles. They get the with without the images, and their separate parlem with the images, and they paid two fifty dollars to stick the two together.

And this was on quantitative finance Fast and this was way early in the rise of the quants. This is this is ninety two. Okay, So so there were there are a third fourth inning. You know, there are a few books out there, but this one was a different style of book. And then from them it turned into software companies, more publishing, et Ceteraally, just were you selling this in the UK in the US worldwide? Well, yeah, my mother and the fax machines. Yea, yeah worldwide. We

we we we we we had. We would give courses in down in Wall streets and we would bring over from the UK boxes full of these books to get to sell to people on on the on the courses and you'd sell them all out, sell them that every time. Um, that's pretty fascinating. Do you still self published because you have a number of books to your credit? This is Wiley?

But what the money formula? But the other quantitative finance books are as as you mentioned earlier, You're hinted earlier you don't make a lot of money usually from from books, unless of J. K. Rolling or someone. Um, So that there came a point where the it was there are other things that were more profitable, more successful, and the books became more of a hobby or a publicity marketing tool really or financial models making people overconfident and reckless

in how they behave in the mark. Well, I don't know where it's true or not, but that I suddenly heard that that actually the accidents involving pedestrians and cyclists have gone up for exactly saying that because no, no, no, no, because of because people feel safe in their car and they've got all these these these cushions and whatnot, they're less likely to be injured. But people drive faster and

so they kill more pedestrians. So my assumption is their texting when they're hitting bi but the or the pedestrians are playing with their phones. No, it could be, could be, could be pedestrians. An't they awful? Um? It depends. It's subjective. When you're driving a car, they're awful. And when you're a pedestrian. Look at these crazy drives cyclists, cyclists in Manhattan horrifying. You know you can cut all that out. We get to try that's great stuff. The yeah, that

what you should do. Of course, it's just stick knives in the in the in the steering wheel period of all. And then you drive very very safely. Then we just get a middle thing over your chest and can you do? What can you do? It's um and you'd have to make sure it doesn't pop up and catch you any but but it's it's it's I do again. Going back

to regulators regulators don't. They don't understand. There's a story I could tell, but it involves it's far too technical, but there's some some practice that people do in banks called calibration. You don't need to know this, but it's something that superficially it looks like it's a good mathematical model, but what it actually does is it it hides risk. It makes it any model risk that's there gets hidden

by this act of calibration. And when I've spoken to regulators, they don't really really understand that what these people who are calibrating it doing is hiding risk. And said they go around telling the thanks you must calibrate, which is like saying you must hide risk, which is really not what regulators are supposed to be doing. So let's talk about your wish list when it comes to better regulations, better education. And I believe in the book you call

it negative bonuses. So what would your what would your wish list be? Well, obviously more people should go to prison, bonuses about some people should, that's the start. The bonus is taken away. But lots of people get paid stupid money. I like CEOs of companies getting stupid money, especially in the because they went to the same school as some other CEO. That's pretty A number of people have blamed

the compensation consultants for using se as their frame of reference. Oh, let's compare to the seventy I all of other CEOs. Why why why are you assuming you're better than most of the other CEOs out there, So you have this horrible upward spiral. It's terrible. It's terrible, but also not for them, but for the rest of Yeah, yeah, yeah, yeah. In the in the in the book, we talk about having something like the you know, the f A A who regulated planes, something like that for banking and complex

financial products. The analogy is that whenever you have a new plane, it has to be tested, etcetera, etcetera. Well, if you have a new financial product, it has it should be tested by some people. Um, you can't have too many of these of this specific you can't have too much concentration risk, just like you can't have too many planes landing the same up at the same time. So in all sorts of analogies we draw between the the airline business and the world of banking. And of

course it's an international thing. Planes take off one country, land another country, well, how hard can it be to have an international perspective to the banking regulation? And I have to ask, since you brought it up earlier, what motivated you and Professor Emmanuel German at Colombia and formally of Alman Sachs to write the Financial Modelers Manifesto. Well, he and I both had pretty much the same um I thought at the same time about and we both

been very skeptical about mathematical models. There's one subtle difference though, and that is Emmanuel Down hasn't his name attached to one, which means he's kind of got a bit of skin in the game that which I haven't got. So I can be slightly more, you know, than he can if you if you catch my drift anyway. Um, but both of us are very skeptical about about the what quantz

doing risk managers in banks and hedge funds. And it was shortly after the crisis that we we both had apparently independently, thought we should write something, which is, we teamed up and it was a combination of Karl Marx and the hippocratic oath that we've We've we've got our inspiration first, do no harm. Yes, we have been speaking with Paul Wilmott. He is a expert in quantitative finance. We love your comments, feedback and suggestions right to us

at m IB podcast at Bloomberg dot net. Check out my daily column on Bloomberg View dot com. You could follow me on Twitter at Rid Halts. I'm Barry Ri Halts. You're listening to Master's in Business on Bloomberg Radio. Welcome to the podcast, Paul, Thank you so much for doing this. I'm I've been looking forward to having this conversation. I wish I can keep you for another couple of hours. Um, but I have to get to at least two questions

before I jump to my standard questions. This is This is from the book The notional value of derivatives in was one point to quadrillion dollars. Is that correct? Yes? Are we still in any sort of risk from a blow up in derivatives? My my assumption is most of that one point to quadrillion offsets itself. What is the actual amount that has us at any sort of risk?

It's it's hard to tell, because yes, that that is notional, So it could be that you might have that could be one point two million million quadrillion in swaps, so that it might just be one percent of that is a risk um which I hustled, not nothing. However, you can exactly however you can calculate it's it's too large because it's that one point to quadrillion. If you can take of zero two, you're still left with something which is which is and the world the GDP of the world,

it's some like fifty trillion. So's it's the wrong way around. It's almost like finance is supposed to be in the service industry, but it's almost like people are making chairs and tables and whatever just to keep the finance industry going. Because the numbers, the tail is working one percent is what a hundred and twenty billion? Is that what we're

talking about off of one drillion, twelve trillion, twelve trillion? Yes, yes, and yes, So that's still that's still a quarter of the world's GDP even if you take off two zero, the numbers, numbers are just mind bargling. And there are all these Since you were running a volatility hedge fund, one of the questions I forgot to ask you before, there are currently all these short volatility products outright there.

What what are your thoughts on news. Well, in our experience that it was definitely the case that options tended to be overpriced. So in terms of of of a strategy, he would be selling vanilla options because they're overpriced. But the problem is selling options is when you have some

extreme events, then you just blow up. So you need to make sure that you've got plenty of tail protection in case what happens, which is something that we we specialized in, and that's why your friends with no seemed to leave. Indeed, we get way back. I recall having a lunch with him. It was just three of us in the middle of the financial crisis. That had to be the summer of oh eight before A, I, G. And Lehman blew up and we were I can't even

tell you. The restaurant Callari ta Verna on Street. Normally you have to make reservations a week in advance. We walk in at one o'clock, it's empty. We sit right down. The three of us were just laughing away. Um, he's I don't have to tell you, he's incredibly entertaining, and we were talking about specifically how parts of this were so obvious coming down the pike, and no it's not that people didn't see it. Nobody wanted to believe it. It was quite quite astonishing. No, he's he's a very

interesting person. You have to be careful when you're aund him because dramatic things always happen, yes, always, always. He's a magnet. He'll be getting he'll be getting some text messages which will tell about some of astronomical sales of his books, or some deal he's involved in, or the markets are doing something crazy. I was, I was with him. I was with him September in by Liverpool Street station when we got the phone call saying what happened? I

was with him. I think was July the seventh in London a few years later when when we had four bombs went off. We were giving a course that day, and um, no, things happen around him with the same It makes sense that he wrote The Black Swan because he is he is a Black Swan. Yes, indeed he is. So it's it's I wrotly. At the same time his book came out, the film The Black Swan came out,

so if you google related completely. Um. So let's get to some of our our favorite questions that we ask all of our guests tell me the most important thing people don't know about your background. I think it's I've never had a job. Is true? That? Well, not really. I had a job when I was when I was seventeen for three weeks. Wait, I know you had a job. You were a professional juggler. Oh, now you see, Well I didn't have a boss. What I mean, I've never

really had a boss. I've been running business since since I was about nine years old, including including the juggling which is on your the bio and your website. I saw that and I'm like, this has to be a type out and her professional juggler, undercover investigator, first man in the UK to obtain an online divorce. These are these are rather unusual curriculum vitae details. It's not it's it's because, yeah, I'm very bad at taking risks physically.

I don't take any physical risks. I don't take many financial risks. But I'm happy to do any number of reputational risks you can throw me. So that. For example, two years ago and a friend of mine who works for a Channel four TV channel in the UK, he wanted he said he wanted to do some investigative undercover thing to find out were the political parties in the UK corrupt? If you offer the money, how far could

you get? Now, previously you would have someone pretend to be someone, and they said they wanted to go a step further in this age of Google, they won't to have someone who was real, a real business person, person

who didn't mind making itself look stupid. And so he thought of me, and so so for six months I had to have meetings with all sorts of politicians of the main parties in the UK and offer them money, and offer them money and so and see how what would happen, how far far I could go, all without entrapping them, so that you know, and all often aren't

you at risk for committing a crime? In the United States, offering an elected official cash to do your bidding is a felony through a nuances here indeed, and they had teams of lawyers because actually because it was a it was a TV program or on the newspaper that the TV channels have a very strict rules. So for example, we couldn't do I ended up doing lots of hidden cameras stuff. But you're not allowed to do that for

TV unless you've got grounds. So we did a lot of prepriority stuff and we got some sort of dodgy things which unfortunately never got recorded. And then I went in with with the equipment on the had the pen in the pocket, the thing in the in the in the Did you catch anybody? Yeah, yeah, yeah there was some somebody had to resign from the lived down party. And so it's great fun. You know, we're coming to

the house of lords with hidden cameras. How do you how do you smuggled hidden cameras into the into the government? Now you have to go through a metal detector and something else. It's harder to do that, exactly, exactly, all right. So so you've never had a boss is the thing most people don't know about you. But but I like special investigator. Let's talk a little about some of your mentors. Who are you? Who are the people who helped guide your career a law? Well, the I guess the obviously

want my mother. My mother, she always she always encouraged me to explains the undercover thing, encouraged me to do things even though they might have frightened me. Again with the caveat nothing physical. I always got out of games at school just reputational risk. Yeah, yeah, anything. Yeah, I'm going to draw the line of singing in public though. Okay,

that's so no karaoke, no, but not to carry oke. Um. So so so I found that that's very helpful that that if something frightens me, I think I've could do it. Now it's frightening me, so I've got to do it. Um. That's a good philosophy, I think. So. Um. And this is way before that, that book Feel of Fear and Do It Anyway, way before decades before that. I'm unfamiliar with that. You don another book, Feel the Feel of Fear and Do It Anyway. Okay, it's some self help,

but from the eighties, I think another one. There's a there's a my tutor and supervisor, John Ockendon. He I was very lucky when I was studying mathematics to fall in with a group of people mathematicians who who like solving real world problems, physical problems, for example, using fluid

mechanics or things like that. Um, because most most mathematicians are quite snobbish about the mathematics, and there's a there's a hierarchy amongst mathematicians which is at the very highest of the people who work on these these very profound, deep problems firms, the you know, theoretical things that you know to the man the street, no idea what they're on about or what the relevance really but really really

tough things, tough, you know. Then you moved down the ranks and pure mathematicians who work in the apps act. Then you've got applied mathematicians and these this group of people would pretty much the lowest of the low in the sense of the hierarchy, and they used the maths to solve real problems. Um, what are they thinking? Exactly exactly? But it was great fun and it gets It means

that that there are a very few people. Actually, I can only think of one other person in the world who's got had such a breadth of mathematical experience as I have. That's why it can be very skeptical about the models, because I've seen so much of the mathematical world that other people haven't seen. And of course when I started working in finance, they had to develop a whole new category even lower than the lowest of the

low for people working in mathematical finance. So I have to ask who was the other person who has a similar breath of mathematical experience. Take him he's um, yeah, he's he's He's worked on a lot of volatility stuff. He's very clever guy, but he's had he's had a boss many times, so he doesn't have the answer to that question. Look what what investors have influenced you? Who? Who's affected your approach to looking at markets? Um? Which investors?

I don't really follow people in that sense. That's a good answer everybody else, says Warren Buffett. But not following people is a net I'm I'm I have this this this talent, which is if if if people say one thing, I say the exact opposite, and it comes a point where I don't really know what my own opinion is. You're just you're just fading the group. I just just you know, annoys people, winds them up. But it sort of works. The divergent opinion is a variant perception absolutely works.

Let's talk about everybody's favorite question. Books. What are some of your favorite books? Finance? Fact fiction or nonfiction? Finance nonfinance? I almost never never ever read nonfiction. Almost never. You only read fiction pretty much only ever read see I love nonfiction, and I never I love fiction, and I never get to it. Okay, so most of what I

read is is nonfiction. I find that the most of the nonfiction that I try to read is sort of obvious, and I think I feel like you'd subscribed to one of these things where they condense a five page book into two page So history, biography, some biographies, but not give us a few times. What do you like? So if you prefer fiction, prefers fiction, I say one of my my all time favorite books is the The Life

and Opinions of Tristram Shandy Gentlemen mid eighteenth century. I think it was It's a totally well, I can't even begin to strive it. It's been described as a as an unfil unfilmable book because it's it's so I can't even begin to describe it. You should read it, Okay, I have not. It's it's a fantastic book. But I tend to alternate fiction. I tend to alternate between yeah, yeah, the Life and Opinions of Tristram Shandy's he's fictional, Tristan

trist Tristram Shandy. I tend to alternate between what you might call a classic book and then something just to just to recover from the classic book. And I'm very and now very impatient with books. Up until the age of thirty, I would say that if I started a book, I had to finish it, and you know, you get you get over that pretty quick. I got it was the greatest thing that ever happened to me, other than birth of my children, to realize that I could just

stop reading a book away. Oh, this is disappointing. So so I if a book's more than say, fond of pages, I probably won't even buy it. If it if it gets rave reviews on Amazon, if it's kind of classical, then I might avoid it because I know it's you know, critique, a little bit funny, and I'll alternate between maybe some classic and something easy. One thing I've discovered relatively recently

is Lee Child. Now you know Lee Child? Sure, Jack Reacher or the fascinating thing about my wife plows through those books. Fascinating thing is of all the kind of he's not exactly pulp fiction, but it's heading that actually he's the only one that middle class people will admit to reading. Oh really, Yes. The funny thing is, if you've seen the movie, it's a short white guy. But in the in the book, it's a tall black guy. I don't know why they didn't catch that. Um he's tall, No,

he's not. I don't think he's black. I thought he was. I don't know how many of you read um one my wife. My wife's read ten. Okay, well I have to have to ask. I could be, but we can definitely agree that Tom Cruise as a short white guy for sure, to say the least. Um, let's one other book. Give me one other thing you've read recently. Something I've read, Oh okay, okay, okay and enjoyed, okay, okay, but you

don't have to have enjoyed I mentioned earlier. J. K. Rowling she wrote this, so you under a pseudonym the book which one I don't remember, but she's done this one called The Cuckoo's Calling something that it's awful. I mean really, I mean really. I love the Harry Potter books, I love them, but this is diet. It's like she's trying to be actually Christie, but it's like three times as long as it should be and you just don't I finished that just because you know what who done it.

But by the time you get to the end, you realize anybody could have done it, and she just picked randomly, so you just did it was rubbish void. Please all right, I'm gonna I'm gonna cross that off my list. Um, So since you first started following quantitative finance, what's changed in the Indians in the industry. What do you think is the Is it the rise of technology, is it the wholesale adoption? What what is the big shift in

quantitative finance? Well, the technology you have to mention technology indeed, Um, but that's happened everywhere, not just in quantity of finance, but also the number of people, the sheer quantities of people, and it's taken over finance pretty much. It has, and I'm not sure that there are the people are necessarily as good as they used to be. That's my sense, saluning the talent pool just through sheer numbers or the warm people being attracted to it. It's a bit of

both and also education. I have my own educational program, the certificate and Quantitative Finance, but most people go through Masters in Finance programs of finance engineering at university and they're taught by by people who don't necessarily understand how the the how the markets work, or you yourself have mentioned between us, we've mentioned verse the psychological side things, and you really have to understand human nature really almost

before you start doing the mathematics. And that's something people completely miss. They think the models explain everything. And most of these programs people go on that that that taught the mathematics, but they're not taught when things break down, why things break down, etcetera. So education is pretty bad, I think. So tell us about a time you failed and what you learned from the experience at the time

I failed. Um, the there's there's one. This may be a bit cheesy, it may not be strictly true, but it sounds quite good. There was a time that we said, I must have been about thirteen, and there was a there was a phase of we were all playing all the card games and gambling, you know, just for pennies, really pennies, because this is it's an early nineteen seventies. And I remember one time making a bet with Billy Jones.

Bill Jones, he's Billy Jones and my class, Billy Jones, another thirteen year old gotcha and it was I think I think it's about seven p right. It was all the money I had in my pocket seven p and I lost this bet. It was a stupid, stupid, stupid bet. But I made the bet and I lost it. And clearly it's you know, you can see me crying now as we speak. It's had an impact on my on my entire life, and I think it's it's made me very risk of us. Well, we're all, we're all theoretically

somewhat risk averse, but you suffered a little. Um, it's actually helpful. The worst thing in the world that can happen to someone is they walk into a casino and win money, or their first time they start training they make money. You're much better off experiencing laws up front, Billy Jones to think, that's right, that's right. Let's let's jump to my our last and two favorite questions. Uh, these are the ones that seem to have the most

amount of resonance with people. So if a recent college graduate or a millennial would come up to you and say, I'm interested in a career in quantitative finance, what sort of advice would you give them? Yeah? Yeah, yeah, yeah, oh okay, what would it? It's it's what do people you usually say for this sort of thing that it

ranges from. It ranges from I'm the wrong person to ask to let me tell you these three things and never forget them, and in between okay, well i'm gonna get I'm gonna give you another point on the spectrum, which is have children early. Okay, postpone the career thing. Really, as much as you can do you have children. So I'm I'm a late bloomer. I would say have children early because most people talk about they want to have

this to get their careers kickstarted. And when they talk about their career, they're always talking about either being a lawyer or or a quantity or something. It's not like they're curing you can wait, it can wait being a lawyer away it really it really upsets me when I see people who who just good around children, but they've anyway. So that would be to just wait a while and have children first and our last and final question, what do you know about quantitative finance today that you wish

you knew twenty five years ago? One thing that well I realized halfway through that period would be that's the There's a lot of people have names attached to models, but usually those models I don't know to offend any friends of mine here, but usually those models offender offend away. How many people listen to this? No, just it's just the two of us. The They have come up with a model, and usually it's it's a minor tweak two to something to some other model, and it's not necessarily

a great model in any way, shape or forming. It's a bad model tweaked to be something else, to be even worse, not even to better. Usually it's tweaked to make it easier to use. And you did not know that twenty years ago. I didn't realize that that was sort of important. Um. And I wonder if I knew that twenty five years ago, would I have taken a different route. I really hope I wouldn't, because my route has always been to do whatever I think is fun. And that's why you look at my list of papers

also of crazy things in that in my list of papers. Um, so that this isn't really something I wish I knew I would take an advantage of. I would like to think I knew it and I decided not to do. It's a it's actually it's it's it's Keane's again. I think it's Kane's it is. He says it is better to fail conventions than to succeed unconventionally, and I very much succeeded unconventionally inventionally. I don't know where I'm going

with any of this, but but it's fascinating. Nonetheless, we have been speaking with Paul Wilmot, quantitative finance expert and author his his latest book, Paul, what's the name of your new book? It's The Money Formula, Don't you Finance? Pseudo science and how mathematicians took over the markets. If you enjoy this conversation, be sure and look up an intro Down an Inch on Apple iTunes and you could see any of the other hundred and fifty or so

such conversations we've had. You could find us on Apple iTunes, overcast wherever fine podcasts are sold. I would be remiss if I did not think the crack staff that helps put this podcast together each week. Medina Parwana is my technical producer and audio engineer. Taylor Riggs is our booker slash producer. Mike bat Nick is our head of research. I'm Barry Ridholtz. You've been listening to Masters in Business on Bloomberg radio