Is mathematics to blame?
Rachel Thomas
Wednesday, 01 October 2008 10:45 UTC
The main culprits in the search for blame for the current financial crisis seem to be the ‘rocket scientists’ (aka the mathematicians), who invented complex financial instruments that the bankers couldn’t understand or manage, or the ‘greedy bankers’ who were more concerned about their end-of-year bonus than about the risks they were taking.
So who do you think is to blame? And should mathematics have predicted the current crisis?
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Replies
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My opinion is almost the exact opposite – mathematicians could probably have saved us from this. It is the fault of generic “business graduates” who don’t understand what they are doing and run from maths. I recently heard a story of a university economics lecturer, who when putting an equation on the board, said “don’t worry, it’s only one equation and you don’t need to learn it.”
There is a good case for more maths in this regard here
Personally I think the whole financial system should be designed so that all this can’t happen, but that’s just the socialist in me…
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I think the thing to remember is that mathematics is a decision support tool, but decision making itself is a human and subjective undertaking (and should be). In our work, we can analyse, present facts and risk analyses, but ultimately a human being must decide if the risk associated with choice X is one they are willing to carry.
There’s a good article to that effect on our blog, here
Yes, mathematicians could have predicted the crisis (and I know a few that had an inkling) but someone has to ask the question first AND be willing to respond to the answer. It is had to convince someone who “just knows” that this is the answer to step back and look at the numbers (though, I do agree that is a fundamental part of what we do as the number guys)
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As Elizabeth Stark said, that Mathematics is a decision making tool. But, the people have lost their mind and started to making decisions mechanically depending on the technoly rather than decide logically.
People became so lazy and started to find easy ways to earn money and therefore, the tutors and advisors on the trading of shares and property have started to brainwash the peole everywhere. Most of the people started to do business for commission.Interest in the production of goods vanished. So, the economy lost its balance.
No one can blame the Maths.
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in the first place why should we blame math? there is no math subject if people doesn’t know how to think logically. math didn’t exist million years ago. people in that year didn’t even knew that they were doing mathematics in thier daily lives.
though math is really the hardest subject of most students now but we should be thankful to those mathematicians who sacrifice their lives, time and effort in order to make and solve equations. math can make our lives easier. -
In the end mathematics is like any other tool or language— depends on how it’s used by humans, or bots.
Many people did employ mathematics to predict the financial crisis- including me- it was actually very simple math found in regional affordability reports.
The complexity in the mortgage securities was a problem that had to do with ethics in the modeling, starting with the misalignment of interests between mortgage brokers and those they sold to, powered of course by far too much capital made available by the FRB, a culture that conveniently looked the other way as the boats all rose together…. until many sank with chains tied to others of course….
The affects of the housing bubble collapse is a different matter and much more difficult to predict in part due to the lack of transparency, which isn’t a math problem unless one intends to employ hackers (not recommended even if legal, which it isn’t) to access the enormous unregulated banking sector, to include many hedge funds and most investment banks in order to find out just how much leverage they had, and how systemic they were. Presumably the FRB will have that power in the future.
However, you bring up a good question in general — how to prevent and avoid crises — particularly systemic. We’ve done a great deal of research in this area over the years, coming to the conclusion that yes all of our major crises during the past decade could have been prevented (a high probability) with the appropriate semantic enterprise architecture like our Kyield system.
We’ve been attempting for over a decade to work with the U.S. government however, suggesting that either crisis is intentional or they need a Kyield system before the culture could recognize that they need a Kyield system. Many discussions with CIOs, members of Congress, agency heads…. one public relations official of the FRB actually told me via email that he was prohibited from forwarding information on systems that are designed to prevent systemic crisis to his supervisors…..
Math plays a role in both the creation and prevention of crises, but clearly holistic systems are necessary that consider all contributing factors, including aligning interests between the organization and individuals, data integrity, cultural management, automation of red flags, linguistics, semantics, and last but not least- institutional ego that assumes for example that solutions are only found within academia and major institutions— if that were the case this crisis would not have happened— a very small group of people from a smaller group of universities were involved with the modeling. They either missed the crisis or were lying. I didn’t- others didn’t – why didn’t they? A good book on the topic generally is ‘A Demon Of Our Own Design’, by Richard Bookstaber, who has been near the core of the math innovation on Wall Street for decades.
We have two white papers that may be of interest – Unleash the Innovation Within, and Understanding the Semantic Enterprise http://www.kyield.com
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