by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I was conducting a class last week when we starting discussing a quote attributed to Einstein that “Elegance is for tailors”. The meaning that I take from this is that as scientists (and as risk managers I consider us to be scientists – although what science(s) we should be is a great topic for a future blog) should be most concerned with the functional and what works, rather than what is mathematically elegant.
There is a lot of finance and risk management that is elegant. The problem is that a lot of it is wrong. It assumes conditions that are only approximately correct (I blogged before on quasi-arbitrage), and thus when scaled up to industrial size the mistakes become huge, rendering the original elegant result not only wrong but misleadingly wrong.
An old saying that I first saw attributed to Riskmetrics rephrases Einstein’s saying as; “It is better to be approximately right, than precisely wrong”. Let’s leave the tailoring to the tailors. (Unfortunately great tailors are a dying breed.)
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