Math Modeling, Education, and Experience

"Risk Mismanagement" by Joe Nocera was published in the Sunday January 4, 2009 New York Times Magazine. It is a well written article describing how Wall Street firms misused mathematical modeling. I am a strong believer in education, and education is required to perform the mathematical modeling at the core of what the "quants" did on Wall Street, so it might seem odd to hear me caution management about relying on mathematical modeling.

Having worked professionally in mathematical modeling of systems that are much better behaved than the stock market, I can say that companies can easily make mistakes with mathematical modeling. The biggest mistake companies make is to think computers can replace people in making decisions, which is central to the New York Times Magazine article.

It is important to educate people to make difficult decisions on complex issues based on deep understanding of underlying principles. People need to be educated to understand the world around them. Too often education is aimed at preparing a minimally educated person to drive a computer program that is intended to think for the minimally educated person, which is recipe for disaster.

I've seen this first hand in industry: highly educated engineers being laid off and replaced with minimally competent engineers and a computer program that is supposed to compensate for the ignorance of the cheaper engineer. This does not work.

We must remember to educate people to high standards, and avoid the mistake of producing the lowest quality employee that might possibly accomplish a minimal quality job. You can see the contempt for human qualities in the words of Walter Lippmann: "... men are not good, but good for something; ... men cannot be educated, but educated for something." [1]

To lower costs, corporations have been driving quality into the ground, and now they have driven the entire economy into the ground.

Minimal education is no education.

Robert Canright

[1] "The Phantom Public" by Walter Lippmann, 1927, ISBN 1-56000-677-3, page 140