Quants fight back

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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.

Yours sincerely,

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