Reality Bites Wall Street Whiz Kids

Quant fund eggheads screwed up just as badly as everyone else
By Sam Gale Rosen,  Newser Staff
Posted Aug 21, 2007 4:48 PM CDT
Reality Bites Wall Street Whiz Kids
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 Federal Reserve, acknowledging that the stock market's plunge posed a threat to the economy, slashed...   (Associated Press)

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. (More quant funds stories.)

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