Evans’ Safer with Gamblers
Dylan Evans Our money is safer with gamblers, Sunday Times (Pay Wall) 15 July 2012.
Once maths replaced intuition in the City, the recession was on the cards, says Dylan Evans
… In the 1970s Wall Street was full of games players – literally. Many of those in investment banking at the time were professional poker, bridge and backgammon players. But in the 1980s and 1990s the risk-lovers were edged out of wall Street and replaced bv a new wave of risk-avoiders.
Many commentators have written about the rise of the “quants”, the mathematicians and scientists who brought scientific models to the markets. …
What the gamblers understood, and most of the quants didn’t, was that these two types of trading climate have the same level of overall risk. It’s just that the risk is distributed differently in each, which leads to different kinds of disaster.
This reflects the views that old-style British bankers were increasingly expressing from before the ‘big bang’ onwards, and even some of the earlier concerns of Keynes. But, Dylan’s remedy seems much too tame:
Competence tests for bankers would have to focus on the most vital skill they require – the ability to assess risks, such as the risk that a debtor might default, or that a company might go bankrupt.
His competence test addresses measurable risks, ignoring Knightian risk. At the time of the UK ‘Big Bang’ deregulation a number of views coincided:
That, contra Keynes, Knight et al, there was no such thing as non-measurable uncertainty.
That even if there was, it was, in principle, impossible to deal with.
That even if it was in theory possible to deal with non-measurable risk and avoid Keynesian crashes, any regulatory institutions (e.g., government) would inevitably be hijacked by peopel of power and influence.
That even if an institutional solution were possible, free markets would do it better.
Some or all of these may be true, but I see little support for the first. I don’t know about old wall-street bankers, but it seems to me that after big bang the new breed were better at measuring measurable risk than the old risk-takers, and increasingly tended to ignore and even deny the existence of those non-measurable risks that the old bankers thought justified their existence (and remuneration and social standing). So the evidence that Evans cites seems to undermine his assumption of (1), which is the most forceful and unconditioned that I have seen for quite a while. Certainly, we need to understand what ‘risk in the round’ is, but what is it?
On a minor point, Evans (above) denigrates the role of the mathematicians and scientists who brought scientific models to the markets. Some may suppose that there is some fundamental problem in applying maths and science to complex subjects such as economics. There is certainly a problem, in that any professionals working within any organisations have to work within the constraints of those organisations, or resign. My own view is that we need more (and different) mathematics (such as Keynes’) and I would almost go as far as to say that we need some science, as against the scientism that Evans cites. Hence we may need more mathematicians and scientists, but doing ‘proper’ maths and science, addressing ‘risk in the round’, and not being rewarded in the way that Evans suggests. I do not know if this is compatible with current managerialist dogma, but let’s not pretend that there isn’t a problem.