Tuesday, 21 July 2009

Maths and the Libel Laws: So Sue Me

Our libel laws deserve ridicule: and Nick Cohen often writes well. But he’s screwed up this time as he claims to have identified the reason why academic mathematicians don’t criticize the work of quants in the banks:

“the quants never understood that the uncertainties in calculating risk were so great, all attempts to measure them were dangerously misleading … but [mathematicians] are not going to speak out for a reason readers of this column will guess: [they] fear being hauled before the libel courts”

This is the merest tosh, but it’s convinced the Speccie:

“Very good to see Nick Cohen banging the drum for the reform of the libel laws. He raises the case of the mathematicians who dismantled the economic models of the bankers who destroyed the UK's financial system. Ministers have urged them to speak out, but they are wisely wary of the libel laws”

Where to start ?

(a) the maths (qua hard sums) conducted by the quants is impeccable, nay, of the very highest standard
(b) no bank ever publishes its models (quite the reverse!): there is nothing detailed to attack
(c) the ‘flaw’ always boils down to the same thing: believing in forecasts (in the case of the stuff quants are working on, typically this will be estimates of future volatility and correlations)
(d) there is no shortage of authority, from Keynes, Galbraith, Drucker and the irascible Taleb, to the most basic risk management textbook, to tell you forcefully that no-one knows what volatility etc will be in the future
(e) "all attempts to measure risk" are NOT "dangerously misleading" (though Taleb can be in his wilder moments)
(f) the quants themselves certainly don’t believe in forecasts – they are mathematicians !

Of course, banks misuse the (impeccable) work of their quants to justify ... anything they fancy. We know this. We know they should punished.

But if there’s a reason why academics are reticent on the subject it’s the usual one – they are angling for jobs / research grants / sponsorship from banks! Simples.

Just to be clear: any banker who bases risk management around belief in a forecast, is a ******* moron. So sue me.

ND

8 comments:

Blue Eyes said...

What on Earth have you done to the layout?!

Nick Drew said...

there may be a couple of tweaks still to come

James Higham said...

That does seem to be why they're so silent or maybe it's the fear of what happens if they do.

Steven_L said...

I'm not sure the banksters are that silent.

From where I'm sitting their grotty little secrets seem to have started puring out around the same time the begging bowl was extended and the redundancy round began.

Get out there on the net and soak up the grotty secrets, because you're paying for the begging bowl and it's all you're going to get in return - well that's how I see it!

Anonymous said...

There is a comment of Dr Johnson's views of Cohen's article athttp://magic-maths-money.blogspot.com/2009/07/even-mathematicians-run-scared-of.html

Nick Drew said...

anon - thanks for the link

Steven - same thing happened after Enron, & for a year or so there was a lot more transparency in the merchant energy sector, loads of mea culpa from the ratings agencies etc etc

but memories are short and everything clammed up again after a while

James - maybe (although academics love having a go at each other) but IF some are holding back I still think it'd be love of £££ rather than fear of libel

Anonymous said...

Ah, i was beaten to it by another anon - I also checked out the "intimidated mathematician" and his research seems utterly mainstream financial maths and what he said was the exact opposite of what was claimed. The idea that banks are scaring mathematicians or traders into silence is plain silly and even with the Guardian's appalling record on accuracy, this article should never have got through.

Anonymous said...

James, they aren't and weren't silent. There are plenty of academics and plenty of people operating in that market who very loudly proclaimed that some of the models for risk were poor. Taleb, Wilmott and Partnoy leap immediately to mind.