A couple of weeks ago, I attended the annual correspondents’ meeting at the Isaac Newton Institute in Cambridge.
Apart from discussions about Institute policy and functioning, these occasions provide entertainment in the form of two lectures. One of the lectures was given by the eminent mathematical biologist Robert May. He talked about some “toy models” of the banking system he has been running, and some of the lessons learned. The lecture has now appeared here on the INI website: well worth watching! He promised a paper in Nature sometime.
Here are some of his points.
- Running toy models does make sense. Examples from his own field show that complex behaviour can occur even in very simple systems.
- The current state of economics recalls the state of ecology when May began work in the area in the 1960s: ecologists then believed in mystical concepts such as the “balance of nature”, which have subsequently been replaced by something more scientific. Economists still believe in the “wisdom of the market”, and follow various leaders in a quasi-religious fashion.
- While undoubtedly many bankers are stupid, and quite a number (especially higher up the tree) are crooks, some of them simply failed to see a fact which is easily demonstrated: what is good for an individual bank in normal circumstances can be disastrous for the system as a whole if there is a serious problem.
- The policy of bundling many toxic assets and giving the bundle a high credit rating was justified by, believe it or not, the Central Limit Theorem, by people who didn’t understand that some kind of independence is required for this theorem to apply.
All good stuff, and told without pulling any punches.
The point about the Central Limit Theorem is particularly important. It shows the value of teaching mathematical understanding rather than just use of mathematical tools.
Someone who worked in the finance industry explained this to me. The people who write the reports are properly educated mathematicians who hedge what they say with the appropriate conditions. But as the report goes up the chain, the conditions get progressively ignored by people who don’t see the point of them.