"Kill All The Quants"?: Models vs. Mania In The Current Financial Crisis

19 May 2009
Andrew W. Lo
In the Said Business School As the shockwaves of the financial crisis of 2008 propagate throughout the global economy, the "blame game" has begun in earnest, with some fingers pointing to the complexity of certain financial securities, and the mathematical models used to manage them. In this talk, I will review the evidence for and against this view, and argue that a broader perspective will show a much different picture.Blaming quantitative analysis for the financial crisis is akin to blaming F = MA for a fallen mountain climber's death. A more productive line of inquiry is to look deeper into the underlying causes of financial crisis, which ultimately leads to the conclusion that bubbles, crashes, and market dislocation are unavoidable consequences of hardwired human behavior coupled with free enterprise and modern capitalism. However, even though crises cannot be legislated away, there are many ways to reduce their disruptive effects, and I will conclude with a set of proposals for regulatory reform.