Lessons for mathematical modelling from the global financial crisis

Professor Lyn Thomas (Southampton University) made the long trip up Nottingham Trent University yesterday to give a talk to the IMA East Midlands Branch on 'Lessons for mathematical modelling from the global financial crisis'.

Lyn wanted to talk to us about the crisis, where the problems were, but, to satisfy the audiences' hunger for mathematics, bring out the issues with the models that were used!

An interesting background to consumer finance, for both the US and UK was given, with some big numbers like 1500 billions of debt in the 2000s, up from 400 billions in the 1980s. Though I didn't note down if this figure was dollars or pounds, but, on the scale of it, I don't think that matters too much as it is a lot of money no matter what!     

The historical aspect to the talk was really quite interesting, I'd suspect that the audience, like me, had some interest in finance, but may not have known about some of the specifics that were involved in the crisis, particularly in the US. If you cannot get to this talk elsewhere, then you may wish to find out more about Fannie Mae and Freddie Mac, two companies whom between them had more than 50% of the US mortgage market in 2000.

The timeline of events continued to meander up to the prime time (or should that be sub-prime time) of 2007-2009 where the crisis really hit. Specifics on what happened leading up to and which contributed to the issues seen during this period were explained - this included the modelling!

Lyn summarised with seven key points, the last being:

• If the model disagrees with common sense think carefully about using it.

The idea of disagreeing with common sense treads the fine line between pushing the boundaries and being able to come up with something new, innovate and useful, or coming up with something that may even cause a global crisis!

The next East Midlands Branch talk is Complex Networks in Biology by Jonathan Crofts (Nottingham Trent University) on 26th January 2012 at the University of Leicester.