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Don't Blame Math For The Madness Of The Markets (Int'l Edition)

International -- Readers Report


Your surprise at the failure of quant "rocket science" is a little disingenuous ("Failed wizards on Wall Street," Finance, Sept. 21). The plain fact is that the sophisticated mathematical models for stock trading and hedging you describe are, by nature, corrigible--since however perfect markets may be, price systems always contain elements of randomness and perturbation. What mathematics can help traders do is to establish optional strategies in a world of bounded rationality where conduct in markets reflects the way sane people ought to behave in a sane world. Introduce the insanity of market distortions due to errors of judgment (from federal or central bank authorities or firms themselves), and even models operating in the most perfect and information-rich markets fail.

Blaming the math is like blaming horoscopes for a bad day--whether the horoscopes had inspired you to leave the house or shelter at home, you might still have had a terrible day. Here at the University of Oxford we are putting together a new diploma to help "quants" get it right more often; we don't expect to be the solution to market-makers' headaches, but we do believe that better math makes for better trading in the long run.

Mark Gray

Kellogg College

University of Oxford

Oxford, EnglandReturn to top


In your interesting article "The Russian bear hasn't mauled Central Europe" (European Business, Sept. 21), you wrote "Leszek Balcerowicz has pledged to put through plans to liberalize the zloty by making it convertible for current-account transactions." I have the pleasure to inform you that the Polish law had done this already in December, 1994, and the International Monetary Fund formally accepted Poland's fulfillment of the so-called Article VIII convertibility in June, 1995. Moreover, there is a long list of capital flows liberalized in Poland, and there are practically no restrictions for long-term transactions with counterparts from Organization for Economic Cooperation & Development countries.

Ryszard Kokoszczynski

Deputy Governor

National Bank of Poland

WarsawReturn to top


The level of credit Aaron Bernstein grants to James K. Galbraith's book Created Unequal: The Crisis of American Pay is surprising ("Can government narrow the wage gap?" Books, Sept. 14). Assertions like "chronic high unemployment rates" being "a fundamental underlying cause" for the increasing wage gap in the U.S. are difficult to sustain, certainly as seen from a global perspective.

Even focused on low-skilled workers and considering the recessions faced during the past 30 years, the U.S. has always been among the countries with the lowest unemployment rates. It is true that, even in a sustained growth conjuncture, a shortage in domestic low wage workers is unlikely to happen. Availability of job seekers and acceleration of technological progress and globalization will indeed leave the have-nots with almost no real wage benefit from the economic leverage.

The wage-gap size is very much dependent on the level of liberalism of government policy. Countries with ultraliberal track records (like Britain) traditionally have a large wage gap. Is this fair or not? It is at least part of the price of keeping unemployment as low as possible. The careful way Tony Blair deploys his Labour policy shows clearly that he wants to continue to cherish entrepreneurs, rather than push up low wages. Blair will stick to some of the proven Tory recipes, even if they are irritating to more orthodox socialist countries in Europe.

The large wage-gap problem is one of the drawbacks of ultraliberal economies. Asking Washington to tackle the problem by acting on unemployment sounds somewhat inappropriate, the more so as it just hit low levels.

Pierre Becquart

Waterloo, BelgiumReturn to top

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