February 26, 2010

A Quantitative Analysis Manifesto?

I have written a little about the utility of quantitative analysis in the field of security studies here and here. Last week, though, I finished Wall Street Journal reporter Scott Patterson's bookir?t=abumuqa-20&l=as2&o=1&a=0307453375 on how quantitative hedge funds -- as opposed to "fundamental" investors like Warren Buffett -- contributed to the Wall Street collapse of 2008. Patterson ends his book with the efforts of some quants to get their analysis to abide by a code of conduct. The resulting manifesto -- written by Paul Wilmott and Emanuel Derman -- can be read here. There are some useful passages, highlighted below, which address the uncomfortable reality that elegant mathmatical formulae don't always describe messy human endeavors like the behavior of the markets -- or war, for that matter.

Physics, because of its astonishing success at predicting the future behavior of material objects from their present state, has inspired most financial modeling. Physicists study the world by repeating the same experiments over and over again to discover forces and their almost magical mathematical laws. Galileo dropped balls off the leaning tower, giant teams in Geneva collide protons on protons, over and over again. If a law is proposed and its predictions contradict experiments, it's back to the drawing board. The method works. The laws of atomic physics are accurate to more than ten decimal places.


It's a different story with finance and economics, which are concerned with the mental world of monetary value. Financial theory has tried hard to emulate the style and elegance of physics in order to discover its own laws. But markets are made of people, who are influenced by events, by their ephemeral feelings about events and by their expectations of other people's feelings. The truth is that there are no fundamental laws in finance. And even if there were, there is no way to run repeatable experiments to verify them. ...


The Modelers' Hippocratic Oath


~ I will remember that I didn't make the world, and it doesn't satisfy my equations.


~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.


~ I will never sacrifice reality for elegance without explaining why I have done so.


~ Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.


~ I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

I found the humility in this manifesto to be really refreshing. What might a similar manifesto look like for those using quantitative analysis to study war? And should the U.S. graduate programs in political science (and subsets of the field, like international relations and security studies) pushing their students toward quantitative analysis be more up-front about the explanatory limits of such analysis? Anyway, borrowing liberally (read: plagiarizing) from Wilmott and Derman, here is what I think a Hippocratic Oath for Quantitative Analysis in Security Studies should look like:

  • War is a human endeavor. I recognize that it is a phenomenon that does not conform to neat mathematical equations.
  • I will use quantitative analysis in conjunction with theory and qualitative analysis to describe what I see as phenomena in war and peace. I will be honest about the limits of both my theory and my analysis.
  • In war and peace, the variables are infinite, and not everything can be measured or assigned a numerical value.
  • I will not use numbers to signify what are fundamentally qualitative assessments without acknowledging to my reader that I have done so in order to satisfy a departmental requirement, gain tenure, or get published in the APSR. Or because I have been in graduate school for so long that I have forgotten how to effectively write in prose.
  • I recognize there are no mathematical equations in Vom Kriege and that it is nonetheless unlikely that my legacy will transcend that of Clausewitz.
  • I recognize that very few squad leaders in the 10th Mountain Division have ever taken a course in statistics yet probably know more about the conduct and realities of war than I do.