Quant Lessons From The Royal Wedding

I like to teach certain quant finance ideas by reference to real life, often involving supermarkets and tins of baked beans (see for example The Role of Mathematics in Finance: Relevance, Reliance, Robustness). This is a great way to dispel embedded foolish ideas and to open minds.

I have this knack of connecting otherwise disjointed topics. Genius? Stupidity? Such a fine line.

So naturally I’d like to point out a couple of aspects of the royal wedding that have quant implications!

Theory vs Practice

Something as blatantly unmeritocratic as the royals cannot possibly work according to any political theory. Obviously they are trivial to criticize, and to find fault with, but on balance the royals in practice are almost certainly a positive force for the UK. Then there are political theories. One from the mid 19th century springs to mind. Looking good on paper (even had a catchy manifesto!), the implementation didn’t quite pan out. Ok, a few million people died, but, hey, nothing’s perfect. Precisely. Nothing is perfect. And that applies to quant finance models. If perfection is not possible, just stick with what works. Aim for better not best. President Blair, President Brown? Less dogmatism in the theorizing, please. Pretty mathematics might be appealing in physics, the mind of god and all that, but not in finance. (Although I do know of a nice Manifesto.)

Fear of Arbitrage

A lot of people are bothered by the cost of the royal family. They cost a pound per UK taxpayer per year. It’s costing you a pound! A pound! Look down the back of the sofa, you could fund your contribution for the next five years. The fact is that the existence of the royals is not materially hurting you personally. This reminds me of people who worry about the existence of arbitrage. They have it in their heads that it is somehow wrong. They worry to such an extent that they change and destroy otherwise reasonable quant models by forcing them to calibrate to every traded instrument. I call this the Fear of Arbitrage. But the strange thing is that they might not be trading some of these instruments. If you aren’t trading them why do you care whether or not they are correctly priced? It’s not rational. It’s emotional. If people want to misprice things, let them. It might not be any of your business.

Sorry to be so deeply uncool but I believe that variety is the spice of life! Congratulations, Catherine and William!

P

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