Suppose that three months ago someone had asked you what the probability was that a virus would cause the stock market to crash in 2020 – not a computer virus, mind you, but a microorganism. You might have said the probability was infinitesimal. You might have said one in 10,000. Or you might have done a study – albeit utterly lacking in statistical significance – of what happened to the stock market when diseases spread in the past.

But if you were honest, you would simply say, “I don’t know what that probability is.”

The quantification mania

A few years ago I attended a conference at which most of the talks were about finance. Of course, the topic of risk was central to many of them.

After a talk by a luncheon speaker, there were audience questions and comments. One of the attendees, John Kay, himself a conference speaker, rose and gave his view that risk was defined not by volatility but through “narratives” – of which I will speak later.

Immediately after lunch I attended one of the afternoon’s parallel sessions. It was given by a finance professor and one of his graduate students.

The professor began by saying, “John Kay says risk is defined by narratives.” He then held his hands up, palms upward, shrugged and said, “What can you do with that?”

What he meant, I soon learned, was, “How can you make use of that observation to develop a long series of complicated-looking mathematical formulas in a PowerPoint presentation?”

Narratives can’t be expressed in mathematical formulas. But in this professor’s view – and the view of much of the academic finance field – you’re “doing something” only if you’re developing a series of complicated-looking mathematical formulas.

I noticed that the assumptions behind this professor’s formulas – which were hardly even touched on in the talk – made no sense whatsoever. I communicated with him about this afterwards, but quickly gave up the discussion.

Once they start wielding what they are thrilled to believe is mathematics, there’s no stopping them.