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February 12, 2012

The mathematical equation that caused the banks to crash | Science | The Observer

The mathematical equation that caused the banks to crash | Science | The Observer.

According to Ian Stewart (who appears in the BBC), the Black Scholes formula caused the Global Financial Crisis. If you read carefully he doesn’t quite say that, he just implies it – suggesting that ‘similar formulas’ were at fault (which may be true). Sadly the article leaves a reader with the impression that the BS formula is the cause.

Many of the comments on the site show most readers don’t see the inaccuracy of his writing. Ian fails to paint the wider political and economic picture which lead to expanded home ownership, and role of the ratings agencies, and the mis-modelling of the behaviour of large groups of people who become defaulting mortgage payers.

I suggest ISDA do one of the rebuttal pieces on this…


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