Apr 6, 2009

The Formula That Shook the World

We all know how central mathematics has become to contemporary economics (and finance), but who would have thought that a (seemingly innocuous) mathematical function could be downright lethal to the world financial and economic systems??

Up until I read this article about the 'Formula That Killed Wall Street', if you had said to me that maths could be responsible for the mess we are in today, I would never have believed you. This all changed when I read about the way in which the 'Gaussian Copula' function was used by the bankers to price the risk of the assets they were acquiring (more specifically, it was used to boil default correlations down to one simple, elegant and irresistible parameter).

Not only is this article is fascinating in terms of shedding light on the detailed mathematical mechanism behind the calamity we are currently involved in, but it also raises a broader, more philosophical question about science and the eventual responsbilities of those engaged in scientific activities for the consequences of their inventions. That is, whilst the inventor of the formula, a math whiz kid by the name of David X. Li (it was Li's paper which pioneered the use of the Gaussian copula function), isn't quoted directly in the article, some mention that Li himself shouldn't be blamed for the way in which his invention was (ab)used by the bankers, and therefore should escape blame for the world's problems. On the other hand, the bankers might say that they, acting in good faith, trusted the formula to be correct in its pricing of risk and therefore should be absolved of their actions.

This article therefore raises an interesting question - to what extent do those involved in scientific endeavours, such as ourselves, bear responsibility for the later consequences of the use of our research? For example, Einstein came to regret the way in which his theory was used in the development of the atomic bomb (although he was not directly involved in the Manhattan Project himself, - he only coauthored a letter urging Roosevelt to commission the project - his theoretical advances were used by his colleagues to develop nuclear weapons and wreak havoc on the world).

So should we as scientists bear any responsbility for the way in which people use our research advances, or is it up to those who twist our research for their own ends to bear the blame?

Interested in your thoughts!!

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