Satyajit Das on What Went Wrong With Finance ? naked capitalism

No, it?s not ?all BS? (nor did he say that it was!)

He?s making the point that the models don?t perfectly reflect reality (as any good engineer will tell you without first costing you a few trillion dollars). As people start relying more and more on the outcomes of those mathematical models and stupidly believing them without understanding the assumptions and underpinning, they become more aggressive in the pricing in order to gain market share (and bonus money, which is stupidly paid out based on very game-able metrics).

Eventually, that pricing no longer reflects the risk, and eventually when everything blows up (?black swan? if you prefer the now-common misnomer), the risk takers go broke. If those risk takers (or, more accurately, their employers) are big enough, they crash the system in the process.

The key point is this: DON?T MISTAKE YOUR MODELS FOR REALITY! For some unfathomable reason, people have to relearn this lesson over and over and over again in almost every field. Numbers are the output of thought?they can never replace thought.

Source: http://www.nakedcapitalism.com/2011/12/satyajit-das-on-what-went-wrong-with-finance.html

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