In April 2010 the Edinburgh International Science Festival hosted a panel discussion that I organised involving Prof Donald Mackenzie, Dr Gillian Tett and, Ms Terri Duhon. This is the text of an article published by The Scotsman (3/4/2010) in the lead up to that event, and the joint BMC/BAMC held in Edinburgh at the same time..
On 2 November 2008 the former French Prime Minister, Michel Rocard, was reported in Le Monde as saying that “mathematicians are guilty (unwittingly) of crimes against humanity” in reference to the financial crises that engulfed the world that year. The following March, our own Financial Services Authority, in their review of the financial crisis, listed one of the causes as “a misplaced reliance in sophisticated mathematics”, and pointed their finger at a technique known as Value at Risk (VaR) (see the FT's response at Maths and markets and my own comment at Maths and the Markets )
A series of events taking place in Edinburgh through April, as part of the Edinburgh International Science Festival and Maths2010, the largest meeting of mathematicians in the UK for five years, will address the question of the role of mathematics in finance, and correct any misconceptions that French premiers and UK regulators might have had – since the FSA have revised their assessment on consideration of the facts.
On April 8 at 11:30, Professor Paul Embrechts, an internationally recognised expert on financial risk management will give a public lecture “Did mathematics really blow up Wall Street”. Paul’s talk will focus on what went wrong; why it went wrong and how, by finance and mathematics working together future crises can be avoided.
The following week, at 8pm on 14 April, Gillian Tett, the Markets Editor at the Financial Times will chair a discussion between Professor Donald Mackenzie, a sociologist at the University of Edinburgh, Terri Duhon, who was involved in the innovation of the financial products traded by the banks and Dr Tim Johnson, a mathematician at Heriot-Watt.
Gillian Tett has emerged as one of the leading authorities of on the credit-crisis, based on her understanding of the activities the banks were involved in, which she describes in her book Fool’s Gold. Donald Mackenzie has been observing the financial markets from his perspective of a sociologist of science and technology for over a decade. He is regarded, both within the industry and by research mathematicians, as having some of the clearest understanding of how and why the mathematics technology failed. Terri Duhon worked for J.P. Morgan when the American investment bank developed the VaR technology and pioneered the use of Collatrorallised Debt Obligations. However, while J.P. Morgan innovated it did not engage in the reckless activities that bought Lehmans down. The key points of Terri’s experience being that not all banks got it wrong and financial innovation is not intrinsically dangerous. Finally Tim Johnson can give insights on the, surprisingly, close relationship between maths and finance and how science can learn as much from finance as finance can learn from mathematics.
Despite the very different backgrounds and perspectives of the panellists, it is likely that there will be some agreement in their conclusions, and like Paul Embrechts’s views, the solution is for mathematicians, social scientists and financiers to work more closely, and also for the public to become more involved in finance, just as society is involved in medical or energy technology.
Gillian Tett mentioned the meeting in here FT column