And her categorical statements about risk and leverage in the FX markets betrays a misunderstanding of how knowledgeable traders in those markets manage their position sizing. Gearing is irrelevent — it is the relationship between position size and risk that matters. But I’ll humor her for the sake of this post.

In my opinion, Lo goes too far with her faith in the Church of Quantitative Reasoning, just as she goes too far in her antipathy toward the methodologies used by those she calls “traders”. As much as I respect her expertise, I think she has arrived at her conclusions because of her own experiences and not due to any objective understanding per se.

Perhaps the recent failures of many quantitative models — and the recent successes of many discretionary traders — should give those adherents to the Faith pause. What will likely happen, however, is the priesthood will conclude that it wasn’t the underpinnings of their theories that were too blame. It was an imperfect application of the dogma. An ever-stricter application of “scientific” principles will thus be required — of course based on data that are really no better than anecdotes. But, to misquote Lo, they will refuse to believe….

I, for one, will stick to good logic rather than good science. And I will eschew religion. On a risk-adjusted basis and over the long term, my educated guess is that quants will be proven to have no real edge over other types of traders. They certainly don’t as of 2007, and likely will not into 2008 as their models unwind in roiling markets.

Quants are here to stay. There are too many people who believe too strongly in the premises of quantitative reasoning. They will undoubtedly shape the markets in their image, not because of some epistemological superiority, but because that is just the way markets work. And there will be traders who will discover ways to exploit this.

My two cents.