This Isn’t Rocket Science…

My firm’s been growing quite a bit recently and there are plenty of new faces around the office.  In one of the ‘getting to know you’ water-cooler type conversations (which never happen anywhere near the actual water cooler), someone asked me why I went into risk management and why I didn’t stay in nuclear physics.  “Well, this isn’t rocket science” I told him.  “It’s much harder than rocket science.”  He thought I was being sarcastic.  Here’s a summary of the explanation I gave:

The so-called “hard sciences” like physics and chemistry are actually significantly easier/better understood than the so-called “social sciences” like economics and social behavior.  We (humans) can launch a probe atop a rocket from a tiny platform on a giant rotating sphere (Earth) and accurately predict where it will land, tens of millions of miles away, on another giant rotating sphere (Mars).  The experts can tell you exactly where that probe will be every second along its journey.  They can even predict, extremely accurately, how its trajectory will change if it passes by an asteroid whose gravity pulls the probe ever so slightly.  That’s precision.  On the other hand, no one can tell you (accurately) what interest rates will be 2 days or even 2 hours from now.  Stock prices?  We have no accurate model to predict their trajectories either.  The so-called experts in this field have lots of opinions and no accuracy.  At least, not when compared to the ‘hard’ sciences.

So I stand by my claim that risk management (and economics) is much much harder than ‘Rocket Science.’  Andrew Lo (an MIT Economics professor) is fond of saying something like “Physicists have 3 laws that explain 99% of physics, while economists have 99 laws than explain 3% of economics.”  While only partially tongue in cheek, the sentiment is quite right.  It isn’t meant to imply that economists have been sitting idle while physicists have solved their problems, nor is it meant to imply one group is smarter than the other.  It is meant to imply that the subject matters are very different: a lot of physics can be explained with just a few gems of insight.  Economics is much harder – even with hundreds of ideas they haven’t explained much at all.

We have only a very basic understanding of the sensitivities of financial instruments.  Sure, any quant can tell you how the price of a bond will change with changing interest rates and how an option’s value will change with changing volatility.  This approach is the same micro-analysis that works in physics: analyze the smallest component of the system and then add them all up to understand how the whole thing works.  That technique works very well in the physical world (which is why we can predict where that probe will be all along its path).  But that technique doesn’t work in complex social systems like economics: the whole thing is not just the sum of its parts because the parts interact in complex ways that do not lend themselves to a bottom-up approach.  Yet still we try.  Efficient Markets.  Mean-Value Optimization. Pareto Efficiency.  Markowitz.  Brownian Motion.  We use the tools we have because we have no others (yet).  Working in a field that hasn’t solved its basic questions is much more exciting than working in a field that has.

That is why I’m in Risk Management – because it isn’t (as easy as) rocket science.

4 Responses to This Isn’t Rocket Science…

  1. Feynor says:

    Social sciences are not sciences by a long shot. They might use the scientific method, but they are NOT science. The hard sciences are that way (predictive to a great level of precision) because they are based on observation of phenomena that are not within our control. They are governed by laws that are universally constant, and any human intervention whatsoever cannot change the laws themselves. We can merely put in place the appropriate environment based on our understanding of the laws to produce the desired results (as in the case of engineering). On the other hand, social systems such as economics and the social sciences are mere constructs of human ingenuity. To use the word ‘law’ here is insulting, because outside of the framework of our construct, it has no meaning. If a certain result is observed for the exact same conditions in every single instance without deviation, then it can be said to be a law.
    Take for example the pareto principle (or the 80-20 rule). Can you really say that this is true in every single instance, without exception? Is not merely someone’s “opinion” wrapped up as an absolute law. To slap on a % on it and call it a ‘law’ is ridiculous.
    My point is, just because rocket science is predictive doesn’t make it ‘easier’ than economics. That, and if it hasn’t come across yet, the way you use the word ‘law’.

    • I guess we’re going to have to agree to disagree. I don’t see why or how social phenomena should be exempt from scientific scrutiny because they are ‘mere constructs of human ingenuity.’ Economies are emergent properties of a complex dynamic and adaptive system and many scientists study exactly that sort of system, whether humans are involved or not. And they are harder to describe than most of the phenomena that science has tackled so far. Science started with the easier topics: falling bodies, etc. precisely because they could be solved using simpler mathematics and tools available at that time. Economics is harder to describe accurately, and we’re just now getting to it in a serious fashion.

  2. Dex says:

    I actually laughed at that. Social sciences are barely sciences.

  3. Great piece, but in particular, I loved the ending 😉

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s