Viewpoint: Tim Johnson

Tim Johnson is the UK Research Council's Academic Fellow in Financial Mathematics based at Heriot-Watt University and the Maxwell Institute for Mathematical Sciences. His main research interests are in optimal stochastic control, and completed his PhD thesis in The Optimal Timing of Investment at King's College London in November 2006. He has a BSc in physics from Imperial College and worked in the energy industry for 16 years before undertaking his PhD. As an academic fellow, he undertakes a range of public engagement activities, ranging from drafting submissions to government to talking to school students.

Public Engagement: As valuable as water?

Adam Smith, famously, could not explain why water, essential for life, was less valued than diamonds, a frivolous luxury.  Sometimes we only know something’s value when it is absent, and this observation is worth bearing in mind when trying to make the case for Public Engagement activities.

Getting people's attention

I was recently asked about the highlight of my PE work. This was easy to identify: it was an editorial in the Financial Times calling for more mathematics funding. This editorial had come about because the Financial Services Authority had been critical of mathematics in its review of the credit crisis; the Science Media Centre put me in contact with the FT’s Science Editor, Clive Cookson, and what I told Clive intrigued him. For over ten years, mathematicians had been investigating the tools that banks and, significantly, regulators were using for financial risk management. Some methods, which were criticised by the FSA, had been condemned, while an audit in 2000 of the key equation used by international regulators found that the equation was unlikely to cope with the complex financial products being developed by banks.

I had been trying to attract the media's attention about the relevance of maths to finance from the start of 2008 (the credit crisis began in August 2007). On one level, the fact that maths is important to finance is a statement of the obvious; the point I was making was that the maths being used by banks is some of the most advanced being used by industry, The City is the largest employer of graduate engineers and physics PhDs, and one approach to the crisis was to think about the mathematical competencies in banks. In particular, did managers in the failed banks consider the scientific basis of their operations in the same way that managers in conventional technology based industries did?

After pretty much a year of frustration, especially in dealing with the main media channels for scientists, who were universally adamant that there was no link between the credit crisis and science, I came to the realisation that the problem was that people did not approach finance in the same way they approached any other industry with a scientific basis. Bankers are perceived as alchemists, turning base metal into gold, whereas the reality is they are STEM graduates using maths to understand complex and stochastic systems. My hypothesis is that if society were more informed about the scientific basis of finance, it would feel more confident in questioning the activities of bankers in much the same way as they question the activities of scientists and engineers in other industries. The FSA failed in its banking regulation because society had not given it the authority to regulate the banks, since society viewed finance as being, in a sense, magical, thus beyond their understanding. The credit crisis of 2008 could have been mitigated if there had been more public engagement by mathematicians.

Causes for concern

Today, the small financial maths community in the UK (around 20 groups and 100 active researchers) are conscious of the need to engage with society - and we are being more active. Ten years ago, it was a quarter of this size and only just emerging as a research area. We did not have the resources to effectively inform the public, not least because industry practitioners had been pushing the boundaries of what we understand, but if we had been able to, I believe banking regulation would have been more robust.

However, a significant concern has emerged: the libel case brought by the British Chiropractors Association against the science writer, Simon Singh. The case has developed so that Dr Singh has to show that the BCA knowingly deceived the public because he used the term “bogus” in a newspaper article commenting on some of the BCA’s published claims. Senior figures in financial maths have been even more explicit in arguing that banks chose to use simplifying models of their activities, because these would lull investors into a false sense of security. The resources of investment banks are far greater than those of the BCA, so if English courts uphold the BCA’s libel claim, financial mathematicians will not risk speaking out again. I predict the consequences of the latter outcome would be another crippling financial crisis in ten years' time.