Examining the big issues facing the global economy, Business Daily demystifies the world of money.…
Which of the following equations is right? Mathematics plus markets equals mayhem, or mathematics plus commonsense equals prosperity. Regulators on both sides of the Atlantic are trying to work it out at the moment. We help them get the right answer.
Mathematicians don't tend to be on the top of anyone's hate list. We imagine them usually as pretty herbivorous creatures not widely thought to be disruptive of society. Now, though, they find themselves trying to convince regulators on both sides of the Atlantic that they weren't to blame for the great crash. The British financial regulator, Lord Turner, talked of a "misplaced reliance on sophisticated maths" in the City of London, referring to computer models that seemed to make buy and sell decisions on a huge scale without a human brain intervening.
First a flavour of the way the mathematical minds worked in finance. Here's a quantitative analyst, or quant, William Hooper, talking to Tim Harford on the BBC just before the system fell apart.
Warren Buffett has warned to beware geeks bearing formulas. And his scepticism about mathematics versus good old human common sense are being echoed widely. Pablo Triana used to be a derivatives trader and an academic at the University of Madrid. He has just written a book called Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? He thinks too much unthinking reliance on mathematical models played a large role in the financial crisis.
But is he right? Dr Tim Johnson of Herriott-Watt University in Scotland is the UK Research Council's academic fellow in financial maths. He's one of the people trying to convince the Financial Services Authority in London and the SEC in Washington that mathematics used wisely is a great benefit.
In the US, the Obama honeymoon doesn't seem to be over yet, though we're sure he knows that there comes a time when disenchantment sets in with all democratically-elected leaders - sometimes sooner, sometimes later. As Mr Obama has been in power now for a little over six months, we thought we'd do a bit of an audit. Here's a view from the right. Our commentator, Irwin Stelzer, is a confidante of prime ministers and presidents, so what does he make of this one?