The challenge of social science

There’s an interesting article in the most recent issue of Technology Review (free registration required) about financial engineers (or “quants”) and the role they played in the financial market meltdown this past summer.

The specifics aren’t relevant here, so I won’t summarize the article (although it makes interesting reading), except to point out that quants are often highly-trained academics in fields like economics, mathematics, and physics that use sophisticated statistical techniques. They who create billions of dollars of wealth by building quantitative models of the stock market and using them to predict (and then act on) the changing prices of stocks. This summer’s financial meltdown was caused in part, the article suggests, because of problems in these models.

The key point in this context was a description of how one of the quants explained the problem:

Emanuel Derman remembers dreaming of such a unified financial theory in the early 1990s, a little after he had made the leap from the university to the Street. But those dreams, he says, are dead. Quantitative finance “superficially resembles physics,” he says, “but the efficacy is very different. In physics, you can do things to 10 significant figures and get the right answer. In finance, you’re lucky if you can tell up from down.”

But by comparison to, say, educational psychology, the quants have it easy. After all:

There are billions of dollars at stake–and therefore much more invested in the work they do;

Unlike in education, the outcomes are clear and well-accepted: either you make money or you don’t;

The data is recorded in reams in the form of stock prices over time, not to mention a host of other indicators that are collected about companies, the economy, and the market;

And most of the data is in the public record, so there are no human subjects issues.

I’m not making apologies for social science, but if it is an accomplishment for them to tell up from down, I’m feeling like handing out a lot of pats on the back at the next conference I go to.

Or billions of dollars, if I have them by then.