Understanding the Financial Crisis:

Did Mathematical Models Fail?






  Modesty: The Missing Element of Mathematical Models of the Market


Shane Whelan, (UCD School of Mathematical Sciences)  



Two distinct cultures study of the capital markets as their common specialism, namely, market practitioners and academic financial economists. The cultures differ in all that defines a culture: their value system. Accordingly, each has a distinct body of knowledge that evolves by a different selection process. We ask: what is the market's valuation of the models proposed by financial economists? It is claimed that actuaries' evaluation of such models, given their market consistent value system, can be identified with the market's valuation. The key insights of financial economics from 1900 are evaluated in this context. We conclude that if models in financial economics are to be judged solely by the accuracy of the predicted outcomes then the models developed to date are not fit-for-purpose. We conclude that academics should be more modest when it comes to claims about the utility of their models.