Math and models are valuable, but we must be mindful of the borders to which they stretch; beyond, wildness lays in wait. Lowenstein reminds us of the frustration expressed by MIT economist Fisher Black, upon moving from academia to Wall Street: “The market appears a lot more efficient on the banks of the Charles River than it does on the banks of the Hudson,” Black griped. LTCM’s error was to trust that it had conjured mathematical models robust to all contingencies within several standard deviations. But what of that realm where models and math seemingly abandon us altogether?
“Most economists today pay — at best — lip service to the difference between risk and uncertainty,” Oxford economist, Sir John Kay, and former Bank of England Governor, Mervyn King, observe in Radical Uncertainty.1 “While recognising the seriousness and cost of the financial crisis, economists have generally been reluctant to accept that their intellectual framework is in need of revision,” they write. [See also the 2022 Academy Article An Interview with John Kay]
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