SciComp - Futures Volatility Surface Calibrator

FSA: It's Worse Than I Feared

Remember my blog about Magicians and Mathematicians in which I complained about the lack of imagination in risk management? If you don't, then please take a look otherwise the rest of this blog won't make any sense to you at all!

Well, I just had a very frightening experience at a conference. I used the magician example to get the audience to open up to the idea of thinking beyond the simple mathematics. I started with "What is the probability of...," and received the usual "One in 52" reply. Then the location (the magic show) was pointed out, and people changed their answer to 100%. Except that some people didn't. There were three people in the audience of maybe 100 who stuck to their original 1/52 answer and refused to budge.

So far so typical.

Now the frightening bit. The audience consisted almost entirely of actuaries. (That's not the frightening bit!) Except for three people from the FSA. And two of those were ones who insisted on the 'math' answer 1/52. (That's the bit that scared me!)

One of them explained his reasoning. I cannot remember the details, it was quite lengthy, but the essence was that "The answer should have been one in 52 except that the magician was tricking us and so really we should ignore this factor..." (I apologise if I have got this wrong, but from the reaction of the audience I don't think I have!)

Now forgive me but isn't the FSA supposed to be operating in the real world in which things are just not about pure mathematics? A world in which risk managers hide risk, moral hazard is rife and magicians do, er, magic. Isn't that sort of the entire point? If it was all about the maths then we wouldn't have the FSA, we'd use someone like the EdExcel examiners to give banks marks out of a hundred at the end of term.

P