I have watched two so far of a BBC2 TV series The City Uncovered with Evan Davis, of which the three parts are:
- Banks and How to Break Them: Evan returns to first principles, and explains exactly how a bank is supposed to work. (R)
- Tricks with Risk: In the second of his series of documentaries on modern finance, Evan Davis heads into the world of the City's risk professionals – the derivatives whizzkids, and hedge fund managers.
- When Markets Go Mad: Evan Davis looks at the roots of the current crisis.
What is interesting is how the big financial institutions rely on mathematics models, of which the Black-Scholes model is the most renowned, to model the performance of derivatives, etc. Many of the high-flyers, it seems, are really rocket scientists, having worked at the Jet Propulsion Laboratory.
This explains to me why it is that financial institutions are so keen to employ physics graduates. I have often taken the line that academic physics is treated much too much as a branch of applied mathematics, and that the more successful students are often the best trained “formula monkeys”. It seems that the world of finance has had too many Homo formulaicus at their keyboards.
But I will now venture perhaps into the realm of scientific poetry. Writers as different as Owen Barfield and Richard Dawkins have noted a strong connection between poetry and science. What I see is a poetic parallel between finance and climate change. We are worried that too much of “greenhouse gases” polluting our atmosphere may cause a catastrophic change in global climate.
Similar, I wonder if the financial models are like the climate models, and a build-up of too many toxic assets (as they are called) have caused the present crash?
