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September 8, 2008 12:21:09 AM CDT

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Reality Bites Wall Street Whiz Kids

Posted Aug 21, 07 4:48 PM CDT in Business,  Glossies 

(Newser) – The eggheads who run Wall Street's "quant funds," using complex algorithms to play the markets but neglecting the human element, screwed up as badly as everyone else during the Dow's recent dive. "They are very smart in front of a textbook but not smart enough to understand very elementary things in reality," one critic tells the Washington Post.

In fact, the Dow's drop was rooted at least partially in massive selloffs by the panicking quant funds, which couldn't react to unexpected occurrences. One expert says the models don't sufficiently take into account extremely rare events like the recent credit clampdown. What's more, the quant funds all invest quite similarly, so mistakes can add up quickly.

Source Washington Post

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Traders and Specialists work the trading floor of the New York Stock Exchange, early Friday, Aug. 17, 2007. Stocks soared Friday, propelling the Dow Jones industrials up more than 180 points, after the...   (Associated Press)
Due to the recent market crises, "quant fund" wizards are being pulled into the public eye.   (Shutterstock.com)
Traffic passes the Nasdaq stock market in this June 19, 2007 file photo in New York. (AP Photo/Mark Lennihan, file)   (Associated Press)
Traders and Specialists work the trading floor of the New York Stock Exchange, early Friday, Aug. 17, 2007. Stocks soared Friday, propelling the Dow Jones industrials up more than 180 points, after the...   (Associated Press)
Specialist Benton Bocklet works at his post on the floor of the New York Stock Exchange, Tuesday, Aug. 14, 2007. Wall Street pulled back sharply Tuesday on anxiety about the pace of consumer spending...   (Associated Press)
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Dow Jones Industrial Average  • Wall Street  • hedge fund  • markets  • James Simons


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