Mathematics + Economics = ?

In the recent times, it has been a matter of dispute to what extent we can apply our mathematical thinking into economics.

During the past years, there have been numerous attempts to do so: some more successful some less. As a matter of fact, some basic economic theories, such as the theory of comparative advantage, have a very strong mathematical basis.

As time has went on , people have started putting more and more faith to conjoining both of these sciences, despite the fact, that Economics are a rather social science, whereas Mathematics is well… a strict science.

Don’t get me wrong. Mathematics has done a great deal of contribution to the field of economics. If it weren’t worth, branches of these sciences such as Econometrics or Mathematical Economics would have never been created.

So you might want to ask: so if mathematics had contributed so greatly, then why all the hate?

Well, as they say: “Too much pudding will choke the dog”.

In our faith that we were able to predict so much based on these models, we have gone perhaps a few steps too far, when inventing the Black-Scholes formula. This was a financial derivative created to “secure risk”.As much as it WAS successful for an amount of time, it all went to “hell”, the second it had a chance to make a mistake.

The model has been unfortunately followed to strictly, causing it to be misused. This faith in the model eventually caused a propelled crash in the stock market, which it wasn’t created to predict.

 

The fall of the Financial Model

This NOT what we were counting for…

So the question is maybe not, if we can predict, but rather how far can we go with our predictions and application of math?

The answer is unfortunately not so simple. You live and learn, but I’m sure we’re yet to hear of something like the recent crash in the future…

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