Paul Wilmott, financial mathematical modeler and all around quant genius, was recently interviewed about how banks relied to much on their (wrong) models to value their assets and how it led to their undoing.Â Of particular interest is how he says they overlooked the human side of the model equation.
"You can model electromagnetic waves: a mathematical model that shows molecules of air moving around a plane, making it fly," he says. "But in a financial model, you need more than numbers. The models in finance are not very good. In this field, it matters if you're not psychologically synchronised; people don't behave rationally. You can't rely on people following equations. It's half maths and half human."Â [by Elena Moya]
The moral of this story is that fear and greed will make you do stupid things.