Wednesday, June 10, 2009

Count us in, maths experts tell UK regulator

Posted in the Financial Times by Clive Cookson, Science Editor:

Mathematicians have urged the financial regulator not to leave them out of the equation when it calculates how to rebuild confidence in the banking system.

“Quants” and other financial geeks might have fallen from favour but maths has an essential role to play in the City, they say.

Sir David Wallace, who chairs the Council for the Mathematical Sciences, has written to Lord Turner, chairman of the Financial Services Authority, asking for a meeting so that he can explain why maths is part of the solution to the banking crisis – and not part of the problem.

Leading financial mathematicians have signed Sir David’s letter, upset by Lord Turner’s review in March, which appeared to blame “misplaced reliance on sophisticated maths” for the crisis.

Lord Turner told the Financial Times on Tuesday that he wished he had used the phrase “misplaced reliance on apparently sophisticated maths” instead. He said the possible interpretation mentioned in Sir David’s letter – that he thought “mathematics per se has a negative effect on the City” – was wrong.

Lord Turner said he looked forward to meeting the mathematicians and hearing how their research could help the FSA’s work.

The problem, he said, was that banks’ mathematical models assumed a “normal” or “Gaussian” distribution of events, represented by the bell curve, which dangerously underestimated the risk of something going seriously wrong.

“The really interesting issue is how much is fixable by using better maths, and how much is inherently uncertain and beyond the scope of mathematical modelling,” Lord Turner said. “I will be keen to engage with the mathematicians on this issue.”

The letter says: “Mathematics is surely the only medium capable of describing quantitatively the complex nature of the products that traders, risk managers, etc are handling, and the economic environment which they are operating in and influencing.”

The letter was signed by 15 university professors specialising in financial maths, including David Hand of Imperial College, Andrew Cairns of Heriot-Watt University and Xunyu Zhou of Oxford. It was endorsed by Britain’s main mathematical bodies, including the Royal Statistical Society and the Institute of Mathematics.

The mathematicians also see a role for themselves “in engaging the public in how mathematics is used in the financial services industry. This will support the objectives of the FSA in creating more informed investors, and will strengthen market discipline”, they wrote.

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