Maths, Money And The Mess We’re In


Tim Johnson writes in Plus magazine:

Consumers, financial institutions, and most importantly regulators did not understand the risks being taken in the financial markets. That was one of the main causes of the current financial crisis according to the Government white paper, Reforming The Financial Markets, released last week. It is clear to all players in the financial market that they need to make more accurate assessments of the risks they and others are taking. But will they be able to take the more scientific approach needed for a deeper understanding of financial risks, when they were so easily bewitched by unproven claims that you can turn financial lead into gold?

Rather than being seen as helping the market understand risk, mathematics has been identified as part of the problem, with Lord Turner’s review of financial regulation blaming a “misplaced reliance on sophisticated mathematics”. Is this justified? Chris Rogers from the University of Cambridge, sums up the view of many academics working in financial maths: “the problem is not that mathematics was used by the banking industry, the problem was that it was abused by the banking industry”. However, mathematicians have been part of the industry, and so must have been part of the problem. But how much responsibility do they bear?

He gives a clear and succinct explanation of the recent use and abuse of risk in the financial sector and concludes:

This aversion to adopting a scientific approach permeates the industry in the UK; the Treasury is the only UK Department of State that does not have a Senior Scientific Advisor. This approach is not sustainable. If the UK financial services industry does not innovate, it will die. To be successful, innovation has to be based on a scientific approach, not on a belief in bankers as alchemists, who have a magical ability to transform base metals into gold.

Picture credit here.

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