Financial Modelers' Manifesto
Encyclopedia
The Financial Modelers' Manifesto was a proposal for more responsibility in risk management
and quantitative finance written by financial engineers Emanuel Derman
and Paul Wilmott
. The manifesto includes a Modelers' Hippocratic Oath
. The structure of the Financial Modelers' Manifesto mirrors that of The Communist Manifesto
of 1848.
The Manifesto and Oath were written in response to the Financial crisis of 2007–2010 with the collapse of subprime mortgages. A shortened version was published in Business Week in December 2008 with the complete version appearing shortly afterwards.
Interestingly, both authors had written extensively about the risks related to financial models
for several years before the crisis; for example:
Emanuel Derman in 1996 :
Paul Wilmott in 2000 :
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
and quantitative finance written by financial engineers Emanuel Derman
Emanuel Derman
Emanuel Derman is a South African-born academic, businessman and writer. He is best known as a quantitative analyst, and author of the book My Life as A Quant: Reflections on Physics and Finance....
and Paul Wilmott
Paul Wilmott
Paul Wilmott is a researcher, consultant and lecturer in quantitative finance. He is best known as the author of various academic and practitioner texts on risk and derivatives, and for Wilmott magazine and Wilmott.com , a quantitative finance portal....
. The manifesto includes a Modelers' Hippocratic Oath
Hippocratic Oath
The Hippocratic Oath is an oath historically taken by physicians and other healthcare professionals swearing to practice medicine ethically. It is widely believed to have been written by Hippocrates, often regarded as the father of western medicine, or by one of his students. The oath is written in...
. The structure of the Financial Modelers' Manifesto mirrors that of The Communist Manifesto
The Communist Manifesto
The Communist Manifesto, originally titled Manifesto of the Communist Party is a short 1848 publication written by the German Marxist political theorists Karl Marx and Friedrich Engels. It has since been recognized as one of the world's most influential political manuscripts. Commissioned by the...
of 1848.
The Manifesto and Oath were written in response to the Financial crisis of 2007–2010 with the collapse of subprime mortgages. A shortened version was published in Business Week in December 2008 with the complete version appearing shortly afterwards.
Interestingly, both authors had written extensively about the risks related to financial models
Financial modeling
Financial modeling is the task of building an abstract representation of a financial decision making situation. This is a mathematical model designed to represent the performance of a financial asset or a portfolio, of a business, a project, or any other investment...
for several years before the crisis; for example:
Emanuel Derman in 1996 :
- "There are always implicit assumptions behind a model and its solution method. But human beings have limited foresight and great imagination, so that, inevitably, a model will be used in ways its creator never intended. This is especially true in trading environments… but it’s also a matter of principle: you just cannot foresee everything. So, even a “correct” model, “correctly” solved, can lead to problems. The more complex the model, the greater this possibility."
Paul Wilmott in 2000 :
- "Unfortunately, as the mathematics of finance reaches higher levels so the level of common sense seems to drop. There have been some well publicised cases of large losses sustained by companies because of their lack of understanding of financial instruments…. It is clear that a major rethink is desperately required if the world is to avoid a mathematician-led market meltdown."