Last week, the Pat Kenny Show on RTE Radio 1 came from the Kilkenomics event in Kilkenny, a gathering of economists, commentators, comedians, politicians and general public to debate the state of the country. It can probably still be downloaded as a podcast from here, (Kilkenomics) if you missed it.
Anyway, he interviewed a guy called John Lanchester. My jaw dropped I was so stunned. So in your service honourable reader I took some time out to transcribe the interview.
PK= Pat Kenny
JL= John Lanchester
??= various audience/panel members
PK You talk about the mathematisation of the economy and finance in general. What is mathematisation?
JL Well you get this thing where the geniuses in the investment banks, they’re called quants, who are the people who do the maths
?? They’re called something else here! Very similar (much laughter)
JL You’ll notice my very precise diction.
The quants came up with these super-precise mathematical formulae designed to put super-precise figures on the exact levels of risk being taken. The trouble is that there are risks you can model in maths and risks you can’t, and they ended up with these complete absurdities. For example, the 1998 Russian bond default was supposed to be a Seven Sigma event, that is, it was supposed to happen only once in every three billion, one hundred and five million, three hundred and ninety-five thousand three hundred and sixty-five years. Events of that level of improbability kept happening month after month.
The 1987 stock market crash was supposed to be what they call a Nineteen Sigma event. That’s supposed to mean that even if the lifetime of the universe were repeated a billion times over, it would still be unlikely. If your maths says that and then the thing happens then you know that your maths is wrong. But they didn’t draw that conclusion.
So when the credit crunch kicked in it was supposed to be a Twenty-five Sigma event. Now a Twenty Sigma event is an ‘all the elementary particles in the universe-to-one’ event. A Twenty-five Sigma event is the same number but with the decimal point moved fifty-two points to the right.
These people in the banks are the wrongest persons who ever lived.
?? John, who would you say is the biggest quant in all of this? (laughter)
Crookedshore: So what do you think of that?