?Is Economics a Science
Dr. Sami Ibrahim Al-Suwailim
Islamic Development Bank, Jeddah, Saudi Arabia
Wednesday 11-01-2017 (13-04-1438H)
Emanuel Derman, director of the Financial Engineering Program at Columbia University, and probably the first “quant” on Wall Street with a Ph.D. in particle physics, makes some interesting comparisons between financial engineering and (real) engineering.
According to Derman (2007), science—mechanics, electrodynamics, molecular biology, and so on—seeks to discover the fundamental principles that describe the world. Engineering is about using those principles constructively for a useful purpose. Thus, mechanical engineering is based on Newton’s laws. Electrical engineering is based on Maxwell’s equations and solid-state physics. Similarly, bio-engineering is based on the principles of biochemistry, physiology, and molecular biology. Derman then asks the obvious question: what is the science behind financial engineering? Having spent about 30 years as a financial engineer, Derman’s answer is unequivocal in its assertion:
Financial engineering rests on a shaky basis … There is as yet no truly reliable financial science beneath financial engineering. … So, while we in financial engineering are rich in techniques (stochastic calculus, optimization, the Hamilton-Jacobi-Bellman equation, and so on), we don’t (yet? ever?) have the right laws of science to exploit. (Derman, 2007, 2011, 2014).