Wednesday, April 15, 2009

Recession!! (Experts Part 2)

On September 18th, 2008 a company called Lehman Brothers filed for bankruptcy. The event marked the beginning of another global financial crisis. All over the world, lives of quite a few people started changing overnight as many lost their jobs, investments burst, businesses were blowing up. Within a matter of few days everybody around started saying that major economic recession has started!

In my opinion a change, of such intensity and taking place so hastily, in the state of the world can only be justified some major natural calamity, a war, or an alien attack. It is simply incomprehensible that fall in the value of some virtual financial instruments so profoundly affects lives of people all over the world.

Why are our systems so vulnerable to such seemingly small changes beyond our control? Don’t we have any control over the situation? Who would answer these questions, our so called experts? If they were the once in charge, we shouldn’t have been here.

One of the reasons behind current global financial crisis is probably overconfidence on mathematical models by our ‘expert’ bakers. As I have understood from some of the readings in last few weeks (Sorry I can’t give exact references right now) the bankers did some foolish mistakes in using these models. Mistakes like ignoring the assumptions on which the models are based or ignoring possibility of events which even though are highly improbable can take us to a point of no return. They probably don’t believe that the world we live in is too complicated to be modeled mathematically.

Thankfully not all the experts get carried away at the same time. Here is an interesting clip of two ‘experts’ who saw this disaster coming. People like Bill Gates and Michael Dell were waiting for more than an hour to listen to these guys during last World Economic Forum.

Here is a similar example showing how unintelligent use of models can lead us to a disaster.

As explained here by Jonah Lehrer, the financial crisis has helped expose a powerful bias in human decision-making, which is our abhorrence of uncertainty.

Can we really conclude anything out of this mess? Probably nothing concrete; understanding the environment we are living in is probably beyond our intellectual capabilities. As put by Nassim Nichola Taleb in Fooled by Randomness.

“The real problem is, as I have mentioned, that such a natural habitat (the one which we are living in for thousands of years) does not include much information…. Much of our problem comes from the fact that we have evolved out of such a habitat faster, much faster than our genes. Even worse; our genes have not changed at all.”

1 comment:

  1. Rightly said. The assumptions used for most of mathematical models are ignored many times by the greedy corporate world. The output or end result of the model may look attractive, but sustainability of model is never thought of in the process.
    Many times I wonder why the subject name of Economics is economics only and why not as "Economical Science" like "Physical Science", I want to mean that , economics is not only considered as mathematically modelled "science" but it has lot of human element which is unpredictable. Appying mathematical models to any subject involving human element may not result in sustainability, thats the fact ! and somehow 'experts' forgot that !