6 ms·

In answer to your metacomment. The financial crisis is a strong indication that, yes financial firms can be terrible at math. Luckily, they have friends who can

In answer to your metacomment. The financial crisis is a strong indication that, yes financial firms can be terrible at math. Luckily, they have friends who can bail them out with taxpayer money when they fail at math.

wool_gather 8y ago
Was that them being terrible at math, or them covering their eyes and singing "lalalala" to pretend the math didn't exist?
- kinkrtyavimoodh 8y ago
  That distinction is irrelevant to the current discussion if the outcome of both scenarios is 'unmathy'
- barrow-rider 8y ago
  Was that them being terrible at math, or them knowing that they were selling overpriced goods (00's houses, 90's tech stocks, probably college degrees) to folks who didn't know the math? Big Finance knew it was hustling rubes, and then was able to ride the Gub'mnt Gravy Train when it became unsustainable.
- guelo 8y ago
  If they ignore the math for whatever reason I would call that being bad at math.
  - marnett 8y ago
    plenty were personally enriched. the personal financials checked out from all angles.
biomene 8y ago
The financial crisis was not a result of bad mathematics. Investments are made because they promise to return dividends. But there is always a chance that they might return lower than expected dividends, or none at all. This can be because the market didn't grow as expected, wages rose above expectations, a tsunami wiped out your factory or an array of other factors completely beyond your control. The best mathematicians in the world cannot predict how many coca cola bottles will be sold in a year.
- hammock 8y ago
  You are framing it as an exercise in foreseen likelihoods and the pill falling on red rather than black in 2008, but there are many counterexamples that say that is not the whole story. Read the Black Swan, or watch Margin Call, for example.
- mturmon 8y ago
  Not so! One can indeed defend the claim that poor mathematical modeling of the statistical properties of collateralized debt obligations (CDOs) was the underlying cause of the bottom falling out of that market. In brief, models were constructed of the complex behaviors of packages of loans - CDOs. These models, trained under benign market conditions, did not account adequately for correlations that might make all their component loans default at once. You can elaborate the story with a lot of context and granular detail, but the core of the crisis did have a strong element of "bad mathematics" -- bad mathematical modeling. For more, see: https://www.maths.ox.ac.uk/system/files/attachments/1000332.pdf https://www.maths.ox.ac.uk/system/files/attachments/1000332.... and references therein.
  - longerthoughts 8y ago
    Your point directly contradicts the conclusions of the paper you linked. The paper concludes that while there were deficiencies with the modelling method (as there are with any model), input manipulation was at greater fault than inherent failures of the model itself. "These results support the arguments of Donnelly & Embrechts[4] and Mackenzie & Spears[12], that Li and the Gaussian copula were not to blame for the Crisis...Instead it appears that the gaming of the model beyond its original assumptions, the outsourcing of CDO risk management to credit rating agencies, and the failure to perform holistic risk assessment seem far more to blame." "The simulation results in this paper show that it is more important to focus on parameter estimation than copula choice. This leads to the observation that when it comes to mathematical financial modelling: in order to avoid a disaster, the cooking is more important than the recipe."
    - mturmon 8y ago

wool_gather 8y ago

Was that them being terrible at math, or them covering their eyes and singing "lalalala" to pretend the math didn't exist?

kinkrtyavimoodh 8y ago
That distinction is irrelevant to the current discussion if the outcome of both scenarios is 'unmathy'
barrow-rider 8y ago
Was that them being terrible at math, or them knowing that they were selling overpriced goods (00's houses, 90's tech stocks, probably college degrees) to folks who didn't know the math? Big Finance knew it was hustling rubes, and then was able to ride the Gub'mnt Gravy Train when it became unsustainable.
guelo 8y ago
If they ignore the math for whatever reason I would call that being bad at math.
- marnett 8y ago
  plenty were personally enriched. the personal financials checked out from all angles.

biomene 8y ago

The financial crisis was not a result of bad mathematics. Investments are made because they promise to return dividends. But there is always a chance that they might return lower than expected dividends, or none at all. This can be because the market didn't grow as expected, wages rose above expectations, a tsunami wiped out your factory or an array of other factors completely beyond your control. The best mathematicians in the world cannot predict how many coca cola bottles will be sold in a year.

hammock 8y ago
You are framing it as an exercise in foreseen likelihoods and the pill falling on red rather than black in 2008, but there are many counterexamples that say that is not the whole story. Read the Black Swan, or watch Margin Call, for example.
mturmon 8y ago
Not so! One can indeed defend the claim that poor mathematical modeling of the statistical properties of collateralized debt obligations (CDOs) was the underlying cause of the bottom falling out of that market. In brief, models were constructed of the complex behaviors of packages of loans - CDOs. These models, trained under benign market conditions, did not account adequately for correlations that might make all their component loans default at once. You can elaborate the story with a lot of context and granular detail, but the core of the crisis did have a strong element of "bad mathematics" -- bad mathematical modeling. For more, see: https://www.maths.ox.ac.uk/system/files/attachments/1000332.pdf https://www.maths.ox.ac.uk/system/files/attachments/1000332.... and references therein.
- longerthoughts 8y ago
  Your point directly contradicts the conclusions of the paper you linked. The paper concludes that while there were deficiencies with the modelling method (as there are with any model), input manipulation was at greater fault than inherent failures of the model itself. "These results support the arguments of Donnelly & Embrechts[4] and Mackenzie & Spears[12], that Li and the Gaussian copula were not to blame for the Crisis...Instead it appears that the gaming of the model beyond its original assumptions, the outsourcing of CDO risk management to credit rating agencies, and the failure to perform holistic risk assessment seem far more to blame." "The simulation results in this paper show that it is more important to focus on parameter estimation than copula choice. This leads to the observation that when it comes to mathematical financial modelling: in order to avoid a disaster, the cooking is more important than the recipe."
  - mturmon 8y ago