Tomorrow Today | Cutting through the complexity: math for the financial world

If making sense of the global financial crisis is difficult for the experts, then it is almost impossible for the layman. But financial mathematician Ernst Eberlein says math holds the key to preventing a repeat.

With a whole host of new investment products, such as swaps, derivatives and futures, the math professor from the University of Freiburg says it is harder than ever to identify and understand risks in the financial markets. But he says math can help. By developing models and formulas, mathematicians can give banks and investors a clearer picture of the potential risks. However he warns that mathematic formulas often give a false sense of security, and are sometimes misinterpreted. We take a look at his work, as he looks at the role played by math has in the crisis, and what mistakes have been made.

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[kensai7gr]

Behavioural finance is the future of economics. You need to understand what's in the human nature (mind) to make accurate predictions.

[vkpillay]

It is easy for mathematicians and economists to come up with models and theories as to what went wrong,but is completely different when it comes to predict who rational or irrational people would behave given a situation where they are following a group behaviour ,like assuming they own a better life than ordainary motals with ability to spend as they wish and no thought for the consequences.Again groups may be many and involves indivoduals making decisions on their own which dampen behaviour.

[hustlerprince]

@vkpillay In truth, it is not that different at all, and that is where the subject of game theory came into play. Mathematicians such as the one in this video deal with PROBABILITIES, meaning that they are not 100% sure of the outcome of an event, but can determine to a reasonable extent the chances it will happen.. Reguardless of way you may think many of the world's problems can only be solved through mathematical means.

[alquiora]

@vkpillay

Obviously, mathematicians are not stupid and aware of many parameters that affect the market every single day. They even know more about market than those people who just make assumptions but in reality do not have the faintest idea of what it's like thinking logically and rigorously like a true mathematician.

[alquiora]

@corymd3470

You're too naive. I bet your mathematics level has never gone beyond that of high school.

[corymd3470]

There is no realm of Platonic mathematical truths. Contextual cause and effect is the only type that there is. People are not mathematical and cannot be fully explained with mathematical truisms. If math can predict everything and explain economic behaviour, then socialism and the Soviet Union would have been a great success.