Financial Times, 20 March 2009
Markets + maths = mayhem. That equation sums up an erroneous view of the role played by mathematics in the banking crisis, which is gaining currency in financial and regulatory circles. For example, this week’s report by Lord Turner, chairman of the UK Financial Services Authority, blamed “misplaced reliance on sophisticated maths” for lulling banks’ top managers into a false sense of security about the risks they were taking. Terms such as quant, geek and rocket scientist, once used in affectionate respect, now have darker connotations.
Mathematicians tend to be shy and retiring, compared with other professional groups, and they have not leapt up to defend themselves in public. In private, however, they are seething – understandably so, since the problem was not the maths itself but the way banks used it.
Contrary to Lord Turner’s assertion, the banks’ sums were not sophisticated enough. They over-simplified, and assumed away the limitations and caveats of their models. They did this to convey an illusion of accuracy and precision, and so convince the market that they had everything under control.