The use, misuse and abuse of mathematics in finance

Abstract

The once ‘gentlemanly’ business of finance has become a game for ‘players’. These players are increasingly technically sophisticated, typically having PhDs in a numerate discipline. The roots of this transformation have their foundation in the 1970s. Since then the financial world has become more and more complex. Unfortunately, as the mathematics of finance reaches higher levels so the level of common sense seems to drop. There have been some well-publicized cases of large losses sustained by companies because of their lack of understanding of financial instruments. In this article we look at the history of financial modelling, the current state of the subject and possible future directions. It is clear that a major rethink is desperately required if the world is to avoid a mathematician-led market meltdown.

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