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.