Tuesday, December 16, 2008

Preventing Another Financial Crisis

Several scholars and journalists have recently criticized the application of mathematical models and high-powered econometrics to the purchase and sale of securities. In an article titled “Wall Street Lays Another Egg” in the December 2008 issue of Vanity Fair, distinguished financial historian Niall Ferguson has written an informative account of the current financial crisis. His central theme is that mathematical models ignore both history and human nature. A particularly poignant phrase, with apologies to Euripides, reads “those whom the gods want to destroy they first teach math.”

Mathematics is extremely useful in many fields of endeavor, but perhaps it has been pushed beyond its applicability in the worlds of academics and finance. To balance the belief that above-average returns require higher risk, for which mathematical models play a crucial role, perhaps all business school students, especially those who specialize in finance, should be required to read and reflect upon Aesop’s fable of the Hare and the Tortoise.

A hare one day ridiculed the short feet and slow pace of the Tortoise, who replied, laughing: "Though you be swift as the wind, I will beat you in a race." The Hare, believing her assertion to be simply impossible, assented to the proposal; and they agreed that the Fox should choose the course and fix the goal. On the day appointed for the race the two started together. The Tortoise never for a moment stopped, but went on with a slow but steady pace straight to the end of the course. The Hare, lying down by the wayside, fell fast asleep. At last waking up, and moving as fast as he could, he saw the Tortoise had reached the goal, and was comfortably dozing after her fatigue.

The Moral: Slow but steady wins the race.

No comments :