The West Wing, Season 5, Episode 17
***He was old school Wall Street, the kind who smashed phones when trades went wrong. People were scared of him, he didn't like math geeks, and he couldn't quite comprehend my Indian accent. Walking into an angry lion's den is not how your first day on the job is supposed to go!
He wanted to talk about options. So, I mumbled about delta and gamma and vega, boasted about how I could do integrals in my head (which, at that time, I kinda' could), and raved about IITs.
How do we price options, he snarled? Black-Scholes, of course, I offered.
You think it's your fancy math that prices options? You are arrogant and haven't the faintest clue about how markets work.
Tell me then, I pushed my luck.
It's people like me who haggle and bluff and negotiate and wager who discover the price of options. Black and Scholes were merely trying to model what we do. Their math is imitation. What we do is the real thing.
Don't get me wrong, he went on, math is important. But it won't make you money. Any dumb old computer can do the math. It's understanding of human psychology that will give you the edge.
Your math is a necessary 30% of the game. But this anyone can learn. The remaining 70% cannot be taught. That's where the magic is.
Talk about a humbling first day at work!
There are some in India who believe that disciplines like engineering and medicine are somehow more valuable than social sciences and liberal arts.
To such people, life is a series of problems to be analytically solved. Whatever the problems, an army of left-brain quasi-robots can be deployed to write programs to solve them. There must be a process for everything, every process must be six sigma certified, and the outcomes must be deterministic.
One can empathize with this worldview. India is a swirling lava of pure chaos; thirst for order is understandable in this maelstrom.
We absolutely need the engineers to lay the pipelines and pathways for information, energy, water, transportation, sewage, and money. We need the doctors to decode DNA and smother disease. We need scientists and mathematicians to advance our knowledge by falsifying superstition.
But this is not all we need. This is the 30%. The 70% will have to come from elsewhere.
I don't remember very much at all of what I learned in the lecture halls of IIT.
What I haven't forgotten is the moment when an English Lit grad student opened my eyes to T S Eliot. There's no algorithm that can possibly replicate the beauty and wisdom in The Four Quartets.
I haven't forgotten either my classmates who killed themselves over - what now seem utterly trivial - disappointments. There is no program that could have solved their problems nor any medicine that could solder back their splattered brains. Psychological counseling might have saved their lives.
Any suggestion that literature and psychology are lesser disciplines is arrogant in the extreme.
Myron Scholes (who subsequently won the Nobel Prize for his work on options pricing) went on to wager and lose an astonishing fortune in the summer of 1998. Wall Street was brought to its knees.
All the formulas in the world couldn't put Humpty Dumpty back together again.
It was also financial engineers whose deterministic certitude brought down the world in 2008. The collapse came as a rude shock to them (although it shouldn't have) for reality did not track their math.
There were dissenting voices sounding the alarm. They understood the fancy models and financial legerdemain, but they also remembered lessons of history and the psychology of markets. They knew about tulips and amnesia, arrogance and humility.
It is in these extraordinary dissents from mechanical models that huge fortunes were made. That's the 70% the old fox wanted me to understand on my first day at work. That's where the magic was.
Let me return to Eliot and close the final loop.
The only wisdom we can hope to acquire
Is the wisdom of humility: humility is endless
I can only wish they taught humility at IITs and every other engineering school in India.