I know, this is a long first post. I've had this on my mind for some time. My apologies in advance.
Do we really want to have a Financial Engineering degree at the University of Illinois?
<Help Wanted from News Gazette>
University of Illinois at Urbana-Champaign, Master of Science in Financial Engineering, Academic Hourly. The Department of Finance seeks an academic hourly employee to assist with student admissions, program marketing and general administrative duties for a new graduate degree program in financial engineering jointly offered with the Department of Industrial and Enterprise Systems Engineering. A bachelor's degree is required, relevant experience preferred....
A little background: Back in February (2009) I wrote a letter to editor of the Wall St Journal complaining about their use of the term 'Financial Engineer'.
I thought they were trying to use the verb 'to engineer' as in 'engineering a business deal' and had incorrectly used the noun, an Engineer.
Surely there's no such thing as a Financial Engineer!
I received a reply and my letter wasn't wasn't printed because "it's an actual degree" from real schools like Columbia and University of Michigan.
Now the University of Illinois, my alma mater, is joining the herd!
Here's my case against this new degree from the U of I:
The U of I's requirement to apply for the "new college" of Industrial and Enterprise Systems Engineering is that you have an undergrad degree from an accredited engineering program.
Engineers are productive units of an economy. They design, build, improve the quality of life of society. The average person in the 21st century in the U.S. lives better than kings and queens of the 18th century due to engineering advancements (flush toilets, potable water, indoor air conditioning, etc, etc).
I agree there are exceptions but by and large, this is the goal of an Engineer.
Financial "math-magicians" are the source of the most recent world economic meltdown. I can't say it any better than the post from economic populist -Pricing CDO not only bad math bad computation too:
"What Arora et al. prove is not only are many derivative mathematical models impossible to compute, never mind in real time, because they require more computing power than the world possesses, the missing information to run a mathematical model is a very good place to cheat with.......Translated to Populist blog speak: Derivatives are a way to scam and screw investors out of their dough through a lot of high fallutin' gobbledygook that sounds real technical."
Wired Magazine's article "Recipe for Disaster: The Formula that Killed Wall Street" explains the most recent problem with the minimum amount of math.
The U of I has an acclaimed Engineering College that has been hard earned (and defended) by the real world performance of every alumni of the College.
Do we want a future Illini to be the next financial wizard to come up with a great formula to cheat and steal?
Will this bring us acclaim or shame?
Clearly the U of I is copying other major universities and will say that we need to have a similar program to compete for the best students. This argument comes down to money.
The question is whose money? and what is the greater good?
Think about that bright shiny new Engineer who graduates from the new Financial Engineering program from the U of I. This is a person who has trained their mind to rigorously approach problem solving and to consider factors of safety because there are always unknowns.
Now 2-1/2 years or so into their big Wall Street job the Engineer has figured out that the whole thing is a scam.
Their job is to obfuscate and confuse to get buyers to part with their money in a no win casino. How do you think this new Alumni will will reconcile the fact that the Emperor has no clothes AND they were trained to ignore this fact by the University of Illinois?
I shudder to think what we have done to that person in the name of money.
You could use the same arguments to abolish all advanced degrees in physics, since it was those high falutin' physicists who built the bomb.
I think we probably need more research and theoretical study and rigorous academic discipline in certain fields, not less.
The program is described at http://www.msfe.illinois.edu/
Clicking on the curriculum, the program is training in the very type of modelling and analysis that led to the recent financial disasters. These models and the culture of those trained in them is discussed in these two articles
These articles discuss the problems and dubious assumptions of these models.
The initial poster in this thread noted: " This argument comes down to money." The UofI, in setting up this program, is doing its own bit of financial engineering.
Michael Fuerst
My drawings, paintings and photos will be displayed (along with those of Alberto Aguilar and Ryan Gray) at Springer Center (NW corner of Randolph and Church in Champaign) through Jan 2. Hours Tues Dec29 - Thurs Dec 31 11am-3pm, Sat Jan 2 8:30am-noon
I'd be happy to give a personally guided tour by appointment on most weekday afternoons or evenings the exhibit is on display. Such a tour is scheduled for 11am on Thurs Dec 31. All are invited. (Will B is for Business risk exposure by coming?)
For exhibit flyer, http://www.ArtComesFuerst.com
For additional preview,
http://www.artcomesfuerst.com/Photos_of_My_Art/index.htm
http://the217.com/events/view/2009/12/12/11317
I am not seeing engineering only applications of financial mathmatics. The College of Engineering should not be a co-sponsor of this program.
"I am not seeing engineering only applications of financial mathmatics. The College of Engineering should not be a co-sponsor of this program."
Engineering is the application of mathematics to practical problems through rigorously defined methodologies and appropriate technologies. I'm seeing engineering all over and through this already, and it's something of which I think we need more.
Michael: what I see in the articles you cite is the sort of healthy dynamic one finds in any relatively young scientific discipline. Lots of research, lots of testing of hypotheses, lots of striving for better models. These are all good things, and we need more of them, not less.
It would be wrong to blame the meltdown on the scientists or the academics. They are not the ones who misused imperfect knowledge. Blame the real villains: the greedy morons who tried to use scientific terms and models they didn't really understand to provide cover for fundamentally bad decisions.
From the Princeton Working Paper, "Computational complexity and information assymetry in financial products" (Arora, Barak, Brunnermeir, Ge) October 19, 2009
From PhysOrg.com's analysis of the Princeton paper
Yes, I can see how there would be a great opportunity for research if one could build an unpriceable product and then try to determine a price.
It might go something like this....University research leads to breakthrough in model design then important professors cash in and are hired away to work for a Hedge fund who has the exclusive use of this new model (no need to publish since secrecy is valuable). More computers are needed for everyone else and now more research is needed and the arms race is on!
I have no problem calling the new degree Financial Physics or even Advanced Computer Driven Finance Economics or even Quantitative Financial Computer Economics just not Financial Engineering.
Students earning these degrees would have a better understanding of what they are buying with their education dollars.
I think maybe some here might have an understanding of engineering that may be too limited. It's not just bridges and dams. Here is "engineering" from the American Heritage Dictionary:
"The application of scientific and mathematical principles to practical ends such as the design, manufacture, and operation of efficient and economical structures, machines, processes, and systems."
In a professional context, engineering also carries a cache of scientific and mathematical discipline combined with rigorous methodology and strict ethical standards. Again, I see a huge need for this in the field of financial research and development.
Kevin: The problem with the models is that their underlying assumptions breakdown with ever-occurring dynamics of societal or economic changes. A good discussion of this is in the first half of the book Guide to the Perplexed by E.F. Schumacher. (The book is much a better read than the description in link indicates) The "scientists" choosing to work in the financial industry naively applied their models although many suspected the underlying assumptions were questionable.
Michael Fuerst
"The "scientists" choosing to work in the financial industry naively applied their models although many suspected the underlying assumptions were questionable."
I would tend to disagree with that characterization. I suspect that the actual scientists working in the industry didn't do anything naively, and they weren't just suspicious; they knew for a fact that there were holes in the models, and probably said so. I just finished the basic intro to finance course at Parkland, and yes, we studied the Black-Scholes options pricing model referenced in one of the NYTimes articles, but we also studied its flaws and deficiencies, which have been well known for years.
I have the textbook from that class in front of me right now, and all throughout it there are models and formulae, and in almost every single case there is a clear and dramatic disclaimer regarding their limitations. They also all clearly identify the parts that are independently quantifiable, and the variables that are just best guesses. In fact, it was sort of a joke among the students in the class that none of the things we were learning and being tested on were reliable enough to be absolutely trusted without healthy dollops of reality and common sense and experience that would serve as both a governor and counter-balance.
The deficiencies in many of the advanced models for derivatives were almost certainly known well in advance. When a model is known to fail under certain circumstances, its misuse is a failure of management.
In the meantime, my favorite quote from the first NYTimes article (whose web page title, in stark contrast to its headline, is "Creating Quant Models That Are Closer to Reality") is this:
"When a bridge over a river collapses, the engineers who built the bridge have to take responsibility. But typically, critics call for improvement and smarter, better-trained engineers — not fewer of them."
Scientists, particularly economists, can model to their "heart's content"; nonetheless, very few of the models used take into account human behavior. This is the wild card variable in this discussion of "financial engineering," a title that causes for me a very long, potentially distrustful pause. Since I am not an economist, I am presently reading Bailout Nation: How greed and easy money corrupted Wall Street and shook the world economy, written by Barry Ritholtz, so I can better understand what has been happening the past 18-24 months put into historical perspective. Based on what I have read so far, no models would have explained or prevented what had happened; not even the historical context prevented what had happened, so why would a degree in financial engineering. :-)
To Kevin--when an engineer signs off on a project, your example of a bridge, that individual has put his/her professional license on the line. When Wall Street went down the tubes, not one of those individuals involved put his/her professional license on the line. :-)
Pattsi Petrie
Pattsi: financial engineers don't have licenses yet. Maybe they should. Accountants do.
And I still contend that the evolving conventional wisdom in the popular press is probably an oversimplification of what actually happened, and who was actually responsible America loves to assign blame, and often gets it wrong in the process.
Every model for evaluating risk that I have seen or studied so far clearly carries within it its own levels of uncertainty, and therefore, risk. I seriously doubt that it was the academics who ignored that fact, since they consistently point it out when they teach the subject, and I would certainly resist any movement to discourage additional academic endeavor in that field.
Kevin:
The deficiencies in many of the advanced models for derivatives were almost certainly known well in advance.
But they are forgotton when people can earn excessive amounts of money to stuff numbers into the models
When a model is known to fail under certain circumstances, its misuse is a failure of management.
Management, when too many levels up, becomes oblivious to the realities below. Wendelll Potter, formerly an executive in the health insurance industry, , realizing such a phenomenon in his industry, choose to quit. His interview with Bil Moyers is enlightening http://www.pbs.org/moyers/journal/07312009/profile.html
I now understand your conceptual and perceptual problems concerning this issue. You need to take art classes at Parkland (like I do), rather than finance classes. :-)
Michael Fuerst
"You need to take art classes at Parkland (like I do), rather than finance classes. :-)"
I will admit that there is more than one level on which an argument could be made that the world would be better off if Milton Friedman had followed that advice...
In reply to Hope Monger's comments:
The cache that you refer to with the term Engineering is what I am defending from being misused in the context of Financial Engineering.
OK, let's have a thought experiment. Imagine that a financial engineer gets an incentive of oh, I don't know, say money or a bonus to reverse engineer a formula and find
how to hide the bad stuff with the good stuffthe faults in the formula.Now they don't actually do the work of hiding the stuff but they show the traders (or management) how to do this. When you to show the faults in the model you also show the way to game the system using the model.
I'm not discouraging the academic endeavor - research all you want. Just don't call what is going on Financial Engineering.
Scientists and academics were an absolutely crucial enabler to the meltdown. Have you ever heard of Long Term Capital Management?
I contend that the systems that are being designed are neither economical nor efficient they are designed to obfuscate and trick. This is the antithesis of engineering.
Since we're getting out the dictionary - which one am I to infer from your name?
mon-ger [muhng-ger, mong-]
–noun
1. a person who is involved with something in a petty or contemptible way
(usually used in combination): a gossipmonger.
2. Chiefly British. a dealer in or trader of a commodity (usually used in combination): fishmonger.
–verb (used with object)
3. to sell; hawk.
Many years ago as an engineering student, I took the calculus series through differential equations for engineering applications. It wasn't until I pursued a business degree in Boston when financial mathmatics became important. Mathmematics is applied in many areas outside engineering thus not under the College of Engineering. Using your logic Kevin, (Engineering is the application of mathematics to practical problems through rigorously defined methodologies and appropriate technologies.) why are there not degrees offered in Music engineering for example?
I am not seeing financial mathematics as an engineering science just an focus area within the college of business. U of I Engineering needs to bale on this one or make it another of those joint degrees with College of Business, namely a 'token' degree for PhD's canidates from either college who didn't/couldn't cut it.
Illini Defender: First of all, my name is not now nor has it ever been Hope Monger.
Second, the graphic is merely a symbolic embrace of charges that were leveled during the last presidential campaign, so you can use any or all of the definitions you found; they all apply on some level. Using it to refer directly to me, however, would be like me calling you "archie." It demonstrates a clear lack of either attention and/or respect.
As to reverse engineering models in order to hide stuff, there are again two points:
1) That's not how financial models work. There's no "hiding" possible or even necessary, at least not in the conventional sense, so there's no need to "reverse engineer" the models to find the faults. They're right up front, and public knowledge. The factors are what they are, and one either understands how they relate to each other, or one doesn't. If you do understand it, you know that the risk is never completely eliminated, and in fact is subject to future events which can not be fully or accurately predicted with absolute certainty. If you choose to ignore that out of greed or carelessness, it's your fault, not the model's.
2) Your use of the term "reverse engineer" in this context contradicts the rest of your arguments. Either it's engineering, or it's not.
You seem to be claiming that the academics can't call it engineering, because the work products of their research or analysis can be misused or distorted in ways that don't live up to the engineering ideal. The same could be said for any branch of engineering, however, because the argument has nothing to do with the discipline itself, but rather with its bastardization or abuse by others.
The best way to solve that is to plunge in deeper, not to back off or pretend that we can make it go away by calling it something else. We need more and better training for financial engineers, not less. And we probably need to enhance their professionalism by using a system for certification, just like any other engineer. It's not like this would be somthing unheard of in finance, since we already do it for accountants and auditors and analysts. It's probably time to do it for financial engineers, as well, if it hasn't been already.
Local Voter: First of all, heavy use of calculus is one of the foundations of financial engineering, and yes, it is the same calculus that is used in other types of engineering. Second, there probably are musical engineers out there somewhere; just not enough of them (or sufficient demand) to warrant a lot of degree programs.
After a little checking, it turns out that there actually are a fair number of degree programs for music engineers, some at engineering schools, but many at schools of music. A lot of them focus on recording or audio applications, but the technology has advanced significantly in recent years, to the point that most of the music you hear on the radio today was enhanced (or sometimes wholly created) by music engineers. Upon reflection, Robert Moog comes to mind as a prominent early music engineer under any definition of the term.
To Kevin Sandefur @ 5:41 P on 28 Dec--yes, I know that those working on Wall Street are not licensed; I was just trying to be ironic. :-)
As to the popular press getting an analysis of what has happened and why wrong, probably has some accuracy because it will take years to get a hold of all of the pertinent documents to enable an academic analysis. Nonetheless until such time, the book I mentioned is an excellent start as are two more discussed last night on the PBS Newshour--John Cassidy's book, How Markets Fail, and Andrew Ross Sorkins's book, Too Big to Fail. Of course, one can always go to the Newshour web site to watch this section of that program.
The take away from these three books is not a need for a degree in financial engineering, but a requirement of 50 semester hours of ethics, all aspects plus the foundation thereof, for each and every person employed in the financial world. The academics can build models, but if those working in the environment do not have sound ethics, models be d____ed. :-)
Pattsi Petrie
"a requirement of 50 semester hours of ethics, all aspects plus the foundation thereof, for each and every person employed in the financial world."
Hard to argue with that. It seems like every business course I've taken so far includes a chapter on ethics somewhere in the textbook. Unfortunately, they also often seem to be the shortest chapters in each book, and even at that, not every instructor or class even gets to them.
If you are really talking about a learning gap the U of I should offer Political Engineering. Certainly the state and the federal government could benefit from politicians who have been taught to solve "...practical problems through rigorously defined methodologies and appropriate technologies".
How about an alliance between the College of Engineering and the School of Social Work to offer a MS in Social Engineering?
Three Score and Ten Plus One
Keith Hays
It would be wrong to blame the meltdown on the scientists or the academics. They are not the ones who misused imperfect knowledge. Blame the real villains: the greedy morons who tried to use scientific terms and models they didn't really understand to provide cover for fundamentally bad decisions.
It also seems like corporations and CEOs are often focused on the short term, and may hope that by the time problems emerge, they'll be somebody else's problems.
Social Engineering is just another term for Political Science, Keith. So the U of I already offers degrees in Political Engineering (Political Science), thankfully without the College of Engineering being involved and I am not sure the graduates follow your problem solving guidance definition.
http://en.wikipedia.org/wiki/Hari_Seldon
Elizabeth Warren, Harvard Law Professor, chairs the five-member committee overseeing and analzying the use of the TARP Funds. She must be a Scorpio and have this as a rising sign. :-) She is tough and on the leading edge of watching the use of TARP funds. There are many web sites about what she is doing. Here are one and another that might interest IP readers. What she is uncovering harkens back to ethics, not financial engineering--or wait a minute--it is financial engineering without ethics. :-)
Pattsi Petrie
Dane: It's funny you should mention that. I was thinking the same thing earlier this morning when we were pondering the impact of group psychology on the modeling of markets. In fact, I find myself thinking of Hari more and more lately.
There's a guy whose name I can't remember right now who claims to have an algorithm that can predict results in nearly any field of endeavor, especially when it involves the interaction of large groups like nation states. It is, of course, proprietary and at least partially controlled by the national secrets act. I'll see if I can find or remember it...