November 17, 2009 / 7:52 PM / 10 years ago

Lessons from the crisis: Re-educate the geeks

TORONTO (Reuters) - The world may have already moved on, but quantitative finance guru Paul Wilmott is undaunted in his quest to save the global financial system from mindless mathematicians.

In North America this week, then on to China and India, the Oxford-trained mathematician is going global with his message to fellow math geeks who permeate big banks and hedge funds everywhere — the people he believes drove the financial world to the brink of collapse last year.

“We’re sort of on a mission,” said Wilmott, explaining his six-month course for quantitative financial analysts — “quants” — who are looking to add real skills to the algorithms that helped bring debt markets to their knees.

In books, opinion pieces, chatrooms and the classroom, Wilmott criticizes the idea that mathematical formulas can predict everything in finance, including human behavior. Somewhere along the line, the assumptions at the heart of quantitative method got mistaken for absolute truths — a mistake Wilmott wants to correct.

With just 18 hours in Toronto, the man Newsweek magazine called “arguably the most influential quant today, the brightest star in their insular, nerdy universe” is making an altar call to financial analysts who want to reform their reliance on models and build a better future for banking.

Refusing a drink at a hotel bar as he geared up for yet another sales pitch to a banking community far from his native Britain, Wilmott insists he remains a mathematician at heart. Even so, he has a rising profile as the cautionary geek who saw the dangers of collateralized debt obligations early on.

Wilmott began warning before the financial crisis — and more successfully since — about the dangers of well-educated financial engineers who relied on mathematical models to predict the value and risk of complex financial instruments.

“I swear the tens of thousands coming out of these (PhD) programs, they’ve got no street smarts whatsoever. They know lots of mathematical theorems — fantastic. But they’ve got no common sense,” Wilmott said of the people who drove developments in derivatives into a debt crisis last year.

Since 2003, he has lured his quant colleagues into his Certificate in Quantitative Finance, or CQF, course, a six-month, part-time program that costs $18,000, offered in classroom or web-based for distance learning. It’s for those who want to supplement their PhD knowledge with practical skills needed in real-world finance.

“It’s still very very maths (focused), but we spend more time emphasizing where the models go wrong, for example, which has become very fashionable. Didn’t used to be so fashionable,” Wilmott mused with an irony honed at Oxford.

But as much as financial rehab may appeal to Wall Street in the wake of bankruptcies and bailouts, the pessimist in Wilmott worries the crisis ended too quickly — with too little pain for the people at the top — for his message to resonate.

“People have already moved on, haven’t they? They’re thinking about other things,” Wilmott said. “We were very close to chaos ... (but) we’ll go back to the old status quo, it’ll be faster than you think. Because that is what always happens. We haven’t reached that kind of tipping point.”

Far from discouraging him, the specter of a crisis wasted and lessons unlearned drive Wilmott through his round-the-world sales pitch for his re-education camps for quants — even if he’s lost track of where he is in the world.

“I hate it when I come into customs and immigration and they ask me these different questions like what day is it and where are you going to be tomorrow? I don’t even know where I am now,” Wilmott said.

But each convert to his cause — about 100 people came out to hear his pitch in Toronto — brings him a step closer to reforming the risk-taking culture on Wall Street.

“We’re doing our best. There are 1,500 CQFs alumni around the world, and applications are up 30 percent over six months ago. I think they are believers,” Wilmott said. “I never thought I’d end up forming a cult, but maybe I have.”

Additional reporting by Pav Jordan and Jennifer Kwan; Editing by Frank McGurty

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