SPIEGEL: Does that mean that we can learn from the history of financial crises and that of money?
Ferguson: Of course we can learn from the past. Ever since the Great Depression we have known how dangerous banking crises are. We can thank our lucky stars that the US Federal Reserve is chaired by Ben Bernanke, a man who spent his entire academic career studying the minutiae of the 1930s Depression. That’s why he knew exactly what to do when crisis hit.
SPIEGEL: But not every banker or manager has the benefit of such historic insight.
Ferguson: Precisely. Companies are filled with mathematicians who sometimes calculate ‘Value at risk’ on the basis of as little as three years of data. If the models don’t even follow the timeframe of a normal business cycle or take account of all the players, but merely focus on the share price at the end of the quarter, it’s hardly surprising when people decide there is no risk. The lessons of history were ignored at every level.
SPIEGEL: So do you think companies should employ more historians and fewer mathematicians?
Ferguson: It wouldn’t hurt. Financial history should at least be a significant part of every business studies course. This kind of knowledge is too important to leave to specialists like me. Unfortunately most of the people who read about financial history are retired bankers. It would have been better if they had read these books earlier.
The use of maths in the banks is also discussed here. The point is that utilising sophisticated maths is not in itself a problem, rather it’s people making underpinning assumptions that they know to be wrong but carry on regardless for marketing or other reasons i.e. misusing maths.
Picture credit here.