Whoops Apocalypse

January 16, 2011 at 12:10 pm Leave a comment

I’ve just read John Lanchester’s excellent book Whoops! Why everyone owes everyone and no one can pay. I strongly recommend this as a clear, accessible examination of how the banks have messed it up for all of us.

I could quote virtually the whole book, were it not for time and copyright restraints. The most revealing part for me was his discussion of risk; this, according to John, was where they made their biggest actual mistake. That’s mistake as opposed to corruption and our old friend greed, you understand, but we know about those anyway, don’t we?

The way John tells it, our banking heroes used (and probably still use) a model to calculate risk based on standard deviations. This model told them that the market crash of 1987 – not the recent one, note – was improbable to the tune of 10 standard deviations. That is, it was very very very unlikely, but it happened even so. After that there were loads of other ‘mini-crashes’ which were still statistically wildly unlikely.

I’m no mathematician and have only a basic grounding in statistics, but – you know what – I think this might have caused me to question the maths behind the risk assessment. Here’s John: “If your mathematical model tells you that something is impossible…and that thing happens, then you know with certainty that your mathematical model is wrong”  For some reason, doubtless unconnected with their huge bonus packages, the bankers failed to cop on to what you and I can understand blindfold.

That, dear Reader, is a special kind of stupid. The kind that needs a million-pound bonus to stop it going abroad to work.   Whoops indeed.


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Who I am

This blog started during the months before the 2010 General Election, in which I was the Green candidate for Calder Valley. It's morphed into an account of green activism...and other meanderings.

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