Saturday, May 14, 2011

MBAs Aren't Good Enough At Math

FLG read this paragraph by Felix Salmon:
Back in 1933, when Ferdinand Pecora uncovered huge scandals on Wall Street, they were easy for all Americans to understand, and easy to protect against. This time around, Wall Street’s activities are incomprehensible not only to the lay person but even to senior bankers: a big part of the reason why the crisis was so big and so bad is precisely that people like Stan O’Neal and Bob Rubin failed at their job of understanding the risks their banks were taking. They were knavishly foolish, but still more fools than knaves — which means that it’s extremely hard to make a strong case in front of a jury that what they did was criminal.

And thought to himself, "I think I wrote something similar earlier." Sure enough, FLG had, and on the exact same topic referring to the exact same issue:
The real problem isn't Li's model, subprime loans, CDOs, or credit default swaps. The real problem is that the MBAs who run the banks don't have enough mathematical education, and may ultimately not be smart enough to understand the nuances and potential dangers posed by complex financial models and products created by the quants in the abstract, and perhaps nobody can know what the possible results will be when those products are shot around the world by automated systems.

Speaking of which, here's a conversation from earlier today:
Mrs. FLG: It'll be good when you're done with the Masters.

FLG: Uh, well, um, I'm toying with the idea of getting another one.

Mrs. FLG: Ugh. I figured something like this was coming. In what exactly?

FLG: Uh, financial mathematics.

Mrs. FLG: Why?

FLG: Well, I really want to understand Itō calculus and Brownian motion.

Mrs. FLG: Why?

FLG: Because I don't now.

3 comments:

The Ancient said...

They were knavishly foolish, but still more fools than knaves — which means that it’s extremely hard to make a strong case in front of a jury that what they did was criminal.

One of your favorite writers makes a pretty strong case for criminal behavior here.

(He's right about one thing: Why charge Roger Clemens and not Lloyd Blankfein?)

Andrew Stevens said...

It would be far easier and cheaper to teach yourself Ito calculus and Brownian motion; you don't need a Master's program for that. It's not nearly as difficult as it looks at first blush. It's just that the notation takes some getting used to.

FLG said...

The Ancient:

Thanks, now I've started reading the damn report, which isn't as open and shut as Taibbi makes it out to be. At least what I've got through so far.

Andrew:

At first, I thought of that, but then realized I'm a lazy idiot.

 
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