Mathematicians collapse the world’s financial institutions

There is a grain of truth in the vast empty silo of that title. Quantitative analysts are paid well for building and interpreting mathematical models of financial markets and risk. Quants are ever-refining these models, so that they incorporate more and more of the real world. This presents two problems. First, relying heavily on mathematical models of financial markets excludes the vast majority of those interested in the markets; let none ignorant of mathematics pass, as someone or other may have said. This turns financial investment into a black (box) art. Secondly, an ever-more complex model excludes most other mathematicians, and frankly prevents any real understanding of the model even from its creator. All one can do is set it up, write a computer program to implement (solve) it, and sit back to look at the results. Almost no direct knowledge can be gleaned by a pencil-and-paper analysis of it; human intelligence and understanding is removed.

Little wonder then that this small group of mathemagical people is receiving the blame for another global financial crisis. Fault lies with them for creating humanfree plug-and-play wizardry whose associated risk is unquantifiable by end-users, and perhaps by themselves. But any small group with arcane access to an inner sanctum of knowledge or lifestyle tends to bear the brunt of the herd’s malcontent when times are hard. It probably doesn’t help that these people, at least according to the BBC article linked just above, seem either to be social misfits or flaunt their wealth and easy way of making it. Of course, all generalizations are false, especially this one, but some of the quants I know personally fit the profile. And here’s where I would like to get a bent ranty (in typical blogosphere fashion) and ask what it can possibly mean to pay someone millions, if not billions, of dollars annually for predicting how a graph will rise or fall?

(Image is in the public domain, downloaded from here.)