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"Beware blind faith in calculations"  5 January 2005, The Financial Times, London financial timeslink

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Sir, You report that children are being
encouraged to study physics with the carrot of a lucrative career in the City as a result of Basel II developments. ("Bankers keen on physics and the City", 30th December 2004)

I applaud science education for its industrial applications and basic maths that helps consumers understand annual percentage rates and keep away from so-called "structured" financial products so temptingly dangled in front of them. Perhaps the pendulum has swung too far in the direction of technophilia and away from common sense. Mathematical measures have become the be-all and end-all of risk management. The assumptions behind Nobel prize winners' models are infrequently questioned. But it is not a question of barrow boy uneducated trader versus physics PhD. There is too often blind faith in calculations that boards do not adequately understand and for which, more dangerously, they are too embarrassed to demand justification. There should be more emphasis on the big picture.

Not one of the financial disasters over the last decade, from Barings to Equitable to Allied Irish, could have been prevented by PhDs in physics. Applying simple common sense, such as traders taking impromptu holidays, can unearth most oddities.

Mathematical ability and familiarity with computer screens is not enough to make a good dealer. Twenty years ago a bank's human resources director, observing that dealers spent all day in front of computer monitors, wondered: "Who else does that?" The bank hired several bright air traffic controllers. They soon picked up the technicalities of foreign exchange. But as air traffic controllers they had been trained to avoid risk at all costs. They just sat frozen in front of their screens.

Corporate presidents should follow the medieval emperors and hire court jesters with a brief to question everything. They should have faith in fools.

yours faithfully
Warren Edwardes, ceo
Delphi Risk Management Limited

yours faithfully
warren edwardes, ceo
delphi risk management ltd
3 hyde park steps
st. george's fields
london W2 2YQ, UK

related articles:

"Managing International Financial Risk: Special Report"  co-author May 2002, published by World Trade Executive ISBN 1 893323 39 0 link

"Things that seem to be free may cost a lot" 12 October 2001, The Financial Times, London financial timeslink

"50 Ways to Lose Your Money" International Finance and Treasury Newsletter, 21 May 2001 link

"The financial future" October 2000, Finance Asia, Hong Kong link

"The Equitable Life: Boards sued for not using derivatives" 10 September 2000, The Sunday Times, London  link

"Technophilia", 4th Quarter 1999, Issue 5 Global Trading, London link

"Less Technophilia - have faith in fools", Leader Column, Apr. 1999, Treasury Management International, London link

key financial instruments by warren edwardes"Key Financial Instruments: understanding and innovating in the world of derivatives" 4 February 2000, Commissioned by Financial Times Prentice Hall ISBN 0273 63300 7 London  link