Money and its Close Relatives
Finance is concerned with the relations between the values of securities and their risk, and with the behavior of those values. It aspires to be a practical field, like physics or chemistry or electrical engineering. As John Maynard Keynes once remarked about economics, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” Dentists rely on science, engineering, empirical knowledge, and heuristics, and there are no theorems in dentistry. Similarly, one would hope that finance would be concerned with laws rather than theorems, with behavior rather than assumptions. One doesn’t seriously describe the behavior of a market with theorems.
— Emanuel Derman (Derman and Miller 2016)
As they say, it's always best to start a story at the beginning. However, problem domains are not simple yarns that merely need unspooling. The very notions of domain order and structure are artificial constructs, coarse linearisations imposed by those attempting to make sense of the mess of concepts and relationships between entities, as well as their behaviours. Because it is imposed, such structure will always be inadequate; the task left to the writer is to choose how inadequate the linear presentation is to be.1
These structural problems are particularly acute in finance and its sister subject economics because, unlike other subjects, they are hostile environments to the scientific method (c.f. Finance and Modeling). As Derman and Miller informed us, "Markets are plagued with anomalies that violate standard financial theories (or, more accurately, theories are plagued by their inability to systematically account for the actual behaviour of markets)." (Derman and Miller 2016) It is important to take this subjectivity into account as we enter our first foray into the domain. The next sections discuss the core topics of the Computational Finance domain.
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