Magic, maths and money
Mon, 07 Aug 2017 13:21:00 GMT
*language*

[PS there are links between Financial Mathematics and the mathematics of population genetics: Alison Etheridge is prominent in both fields. My gut instinct was the apparent lack of non-Caucasian genes in the current British population was not evidence of their having been non-Caucasian Romans in Britain. @mpigliucci explains this and highlights how Taleb is a victim of his own biases.]

I was also interested because Taleb was involved. Along with many academic mathematicians working on finance I do not have a strong affinity with Black Swan or Fooled by Randomness. The reason why is as follows. Taleb, along with other ‘public’ financial mathematicians like Elie Ayache and Doyne Farmer, were part of a cohort of applied mathematicians, engineers and physicists who entered finance in the 1970s and 1980s, were successful, became rich and have used that wealth to direct public perceptions of financial mathematics. At the time, option pricing was accomplished by solving partial differential equations and these ‘quants’ had expertise rooted in dynamical – deterministic – systems (note that Taleb’s mathematical PhD in Management Science was awarded in 1998, not before he went into Finance with an MBA). There is a sense amongst most actuaries and financial mathematicians, trained in probability theory, that Taleb’s books resonate with this audience because the books highlight the significance of randomness, something these people were not really educated in. As one senior British actuary said to me: “What does Taleb think actuarial science has been concerned with for 300 years if not Black Swans and not being Fooled by Randomness”. This frustration reflects decades of ‘quants’ in banks regarding actuaries as being ponderous dinosaurs.

In mathematics, an object is something we can quantify. Now comes the problem: in economics, what we need to identify is the relation between emotions (greed, fear of loss, investor euphoria, etc.) and behavior (buying, selling, tolerance for risk, and so forth).

Alas, this requires that we mathematize emotions. To my knowledge, no one has succeeded in doing this in some 8,000 years of recorded history.

*epithymetikon*(‘from the heart’) was the part of the soul concerned with carnal desires, sometimes represented as a black horse. Alongside this was the

*thymoeides*(‘spirit’) and represented energy and the motivation to act, this was sometimes represented as a white horse. The third component was the

*logistikon*(‘reason’, from logos the Greek for ‘what is said’) or nous (‘mind’) that distinguishes right from wrong, which Plato associated with the Athenian temperament. The

*logistikon*was sometimes represented as a charioteer controlling the other parts of the soul, making sure that the spirit would not become dominated by carnal desires, which would be wrong. Through the medieval period these ideas became refined into one of balancing passions and interests. This did not involve quantification, which is only a small part of mathematics, but by identifying a balance point, which involves measurement. Adam Smith's great contribution, according to Albert Hirschman, was in enabling the quantification of passions and interests through money, precipitating capitalism tied up with utility maximisation. My argument in EQF is that part of the long story of financial mathematics is concerned with this balancing of passions and interests and this was considered to be a question of Justice. This predates Smith's quantification of passions and interests,. When mathematics was dominated by geometry, this was considered in terms of proportions, but with monetisation came arithmetic.

*language*