Monday, April 20, 2009

Mathematical and computational Models that fail..

Nobel winners goofed on financial risk models and climate experts over estimated temperatures. Michael Barone connects the two:
Beware of geeks bearing formulas. That's the lesson most of us have learned from the financial crisis. The "quants" who devised the risk models that induced so many financial institutions to buy mortgage-backed securities thought they had reduced risk down to zero.

Turns out they got a few things wrong. Their formulas were based on only a few years of actual data. Or they failed to take into account the possibility that housing prices would fall. Or that the market for mortgage-backed securities might suddenly stop functioning.

The lesson seems clear. Don't allow a whole system to become hostage to the workings of some geek's formula. Keep in mind the possibility that the real world might not behave as the formula indicates.

But, astonishingly, our society seems about to forget that lesson, just as it should have been learned. Congress is poised, at least if the Obama administration gets its way, to pass major new laws on carbon emissions and on health care whose success depends on geeks bearing formulas.


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