Chapter 2 describes the author’s journey of disillusionment rising from her front row seat during the 2008 financial crisis all the way up to her entry into the e-commerce big data industry. The author shares her story of being enchanted by the glitz and glamor of the financial industry that is heavily backed by cryptic and often times unfair mathematical models. And, this was a story of not just herself but of all the people who were mesmerized by the false hopes of these models. These are the same people who invested their hard-earned money in the fraudulent and unregulated mortgage backed schemes only to later find that their so-called dumb money was disposable and that they, were disposable.
Banks and hedge funds at that time were operating under two false assumptions. At first, they bestowed excessive reliance on the mathematical models to design securities that would allow these financial firms to loan money to almost anyone without carrying out due diligence, based on the fact that these models had all the risk factors sorted out for optimizing returns. However, the truth is that these models are designed based on historical data. Cataclysmic incidents like the great depression, the 2008 financial crisis or the 2020 COVID disaster are really not accounted for in these models. As a result, novel hedging schemes on bankrupt stocks like Hertz and GameStop are being fueled at scale by these models and their application interfaces. Secondly, financial institutions were under the assumption that not a lot of people will default at the same time which proved equally wrong and brought about a wrath of financial disaster back in 2008.
At one point, banks started to lose trust in each other and eventually the inter-bank interest rates rose high. Then, further schemes were devised to cover up existing schemes. In order to increase the trust and a sense of security, insurance on credit loans were being offered in the form of a credit default swaps with bonds. But, these financial devices also failed and eventually led to a seismic collapse of the market. Later when it was time for salvation, these mathematical models quite simply failed. A rescue was called for and required meticulous human intervention.
In my opinion, mathematical models were not the root cause for these catastrophes. Back in the days of the tulip bubble, the great depression or the dot com bubble, quantitative analysis was not at a stage it is nowadays. But, even then the bubbles burst and brought about recessions. The only difference these mathematical models created was to scale up the impact of the repercussions. Hedge funds have always been there. According to the author they don’t create the markets but they capitalize and time the movement of the markets to optimize profit. Like any other game, there will always be winners and losers. Just that in the finance industry, it is usually the uneducated and the ones tending to jump on the bandwagon without sufficient research, who end up losing their hard-earned so called dumb money.
The author’s journey of disillusionment started when she realized that her mathematical models were helping such a firm to funnel in dumb money and to leave the dumb investors broke. She jump shipped and joined a third party risk analytics company and eventually landed a job as an ecommerce data scientist with hopes of emancipation from the chains of such financial systems. The author started off as managing market movements and ended up counting clicks on websites. But, to her surprise this did not mark the end of her disillusionment. She identified a similar pattern in the ecommerce industry where there were abundant self-serving definitions of success and a dystopian inequality. The author has expressed her experiences in this journey of disillusionment through her blog. However, she is finding it hard to keep up as the number of such big data mismanagement is easily outpacing her efforts of disseminating awareness about the very same.
