Quantitative Finance - Art or Science?

Science and ArtUniversal Law of Gravitation Geometric Brownian Motionm m& tt1 21xG2G= (6.67428 +/- 0.00067) x 10-11 m3 kg-1 s-2 dB B rdtt=tm =rdS= S μdt+ S σdWtt⇒ f 0= e−rTEQ[ f ( S )]T• All variables and constants are measurable &therefore their functional relationship can betested• All variables and constants are measurable &therefore their functional relationship can betested• Known empirical phenomena, like Kepler's laws,can be deducted from the mathematical model• Known empirical phenomena like fat tailed equityreturn distributions or non-constant volatilitiescannot be deduced from this model• New predictions, like the existence of newunknown planets, are made & verified throughobservations or experiments• The model does not make any new predictions &predicted derivative prices are in contradictionwith observed prices• Findings do not change if we replace above models by more sophisticated versions4