Opinion 32: Mathematicians, and Math, Should Not Be Blamed for the Debacle of the Hedge Funds

By Doron Zeilberger

Written: Nov. 13, 1998

I could not have helped feeling a little gleeful at the recent debacle of the hedge funds, and a little annoyed at the government for the bailout, that shows that the status of people in our society is proportional not to their monetary worth, but rather to its absolute value.

A year or so ago, it was a triumph to math. Myron Scholes and Robert C. Merton won an Economics Nobel prize for co-discovering and further applying, respectively, the famous Black-Scholes formula. Mathematicians felt very proud that the rarefied field of stochastic differential equations, and the Ito calculus, could be used so effectively in Wall Street.

Then came the downfall. Is that an embarrassment to math? Not at all. The only mathematician in the story, who probably did AT LEAST HALF of the work, Fischer Black, died a few years ago, making him ineligible to win the Nobel prize. Even though one can never be sure, I am inclined to believe that he would not have shared the disgrace of Merton and Scholes who became investors, and abused their reputation, and apparently did some old-fashioned gambling, without checking, like a good mathematician would, that all the assumptions of the theorem are satisfied, before drawing conclusions.

Which is hardy surprising! Neither Merton nor Scholes are mathematicians! They are economists who are good at math. When the Nobel committee tried to reach Scholes to inform him about the big news, he could not be reached, since he was out of town, playing golf. Have you ever met a SERIOUS mathematician who plays golf?

The Black-Scholes formula started a whole new cottage industry of `rocket scientists', who were hired by Wall Street to implement the formula. HOWEVER, Very Few Mathematicians were hired! They were considered too slow, cautions and pedantic. Instead, hundreds of theoretical physicists, who do not have any scruples using approximations without rigorous error bounds, were preferred.

So there, Wall Street! you hired physicists, because they could come up with a quick-and-dirty approximations in Real Time, so that you can get rich fast. And see what happened? But, of course you don't care, Uncle Sam would always bail you out since he wants to avoid a crash. So, after all you are safe.

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