<p>CD,</p>
<p>Don’t blame the quants for the failures of the past year. Models are just that - a concept of what has our could happen. The key variables that go into a model (such as backtest time period, range of variables to use, heck, any assumption) are subjective decisions often made by the management using the models. And, the even bigger issue is how the models/results are used. The quants don’t often have a lot of say in that. </p>
<p>To put it another way, I would not blame the guy who first observed and quantified that there was an untapped borrower segment out there if one used more subprime loans. Instead, I’d fault the management who decided to use such results and throw all their eggs in that one basket. Or worse, designed programs such that they scored (in the short term) off the transaction fees, got their bonuses and quit…</p>