Members of the financial services quantitative community do not take kindly to the implication that complex maths was behind the crisis. They have therefore penned the letter below to Lord Turner in reponse to his March review of financial services regulation.
We’ve highlighted the most relevant bits. The upshot? Quants are needed. They share the aims of the FSA and should work with banks to improve directors’ understanding of mathematics….
Dear Lord Turner,
I write as Chair of the Council for the Mathematical Sciences (comprising the Institute of Mathematics and its Applications, the London Mathematical Society, the Royal
Statistical Society, the Edinburgh Mathematical Society and the Operational Research
Society), on behalf of a group of representatives of the financial mathematics research
We are aware that you are due to appear before the Treasury Select Committee later
this month, and hope very much that before then you and colleagues from the FSA will
be able to meet a small group from among those listed below. We would be very
pleased if this meeting was the beginning of an active and productive engagement with
researchers in the mathematical sciences, in support of the FSA’s objectives.
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. Recent events have shown the magnitude of this challenge. It is surely equally true that a regulatory framework will be able to control this complexity only if it likewise is based on sound understanding and credible modelling. We do not underestimate the difficulty: even ‘dead’ collective behaviour described by simple underlying equations, such as turbulent fluid flow, remains inadequately understood.
The financial mathematics community also sees a role for itself 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,” one of the pillars of Basel II. There is also a benefit in working with directors
of financial institutions to develop their understanding of how mathematics can be used
by managers to support their decision making.
Another aspect on which we would welcome dialogue concerns the reference to a
“misplaced reliance on sophisticated maths” and the possible interpretation that
mathematics per se has a negative effect in the city. You can imagine that we strongly
disagree with this interpretation! But of course the purpose of mathematical and
statistical models must be better understood. In particular, we believe that the FSA and
the research community share an objective to enhance public appreciation of
uncertainties in modelling future behaviour.
Looking forward, we hope that the FSA will wish to explore how the network of
expertise in UK universities can support it in its regulatory role. The community is keen
to do this, not least because of the opportunity it offers to meet the Government’s expectation that public funding of research should have impact.
Professor Sir David Wallace CBE FRS FREng
Chair, Council for the Mathematical Sciences
cc: Professor John Beddington, Chief Scientific Advisor to the Government
The Treasury Select Committee
Sent on behalf of:
Professor R. Brummelhuis Birkbeck College London
Professor A. J. G. Cairns Heriot-Watt University
Professor M. H. A. Davis Imperial College London
Professor D. J. Hand Imperial College London
Professor D. Hobson University of Warwick
Professor S. Hodges Cass Business School
Professor S. Howison University of Oxford
Professor L. P. Hughston Imperial College London
Professor S. Levendorskii University of Leicester
Professor T. Lyons University of Oxford
Professor A. J. McNeil Heriot-Watt University
Professor G. Peskir University of Manchester
Professor L. C. G. Rogers University of Cambridge
Professor W. T. Shaw King’s College London
Professor M. Zervos London School of Economics
Professor X. Y. Zhou University of Oxford