Why do we need Quants?
Hint: We don’t really.
I have been wondering why banks hire quants. Most of their pricing models have no connection with the real world and do not take into account strategic interactions. In addition, most assets banks trade now have no open markets and are traded over the counter and there is, therefore, no way to verify how well their pricing strategies work.
So, why do we need quants? They are expensive and their value is not clear. Well, they are just like advertising. Why do we need celebrities to endorse products? They are expensive to hire and have no extra expertise in assessing the quality of a product. However, it is precisely that they are expensive that we get information. They are costly signals, telling us that the producer has such a good product they can burn money in front of our eyes.
Quants fulfill the same role. They are not better positioned to price complex securities. They simply represent a costly signal. When you are selling me a product and I know an army of quants is sitting behind you that are paid lots of money, the chances that this product is garbage should be low.
So, quants fulfill a useful role as signaling devices. But do they? In a market where mistakes are not penalized and your mistakes are paid for by the public, costly signals fail to convey any information. So, why keep hiring quants? Maybe we need to keep the illusion alive that the finance industry actually does something instead of just making up products and making up their prices.
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