The Black-Scholes equation was the mathematical justification for the trading that plunged the world’s banks into catastrophe
The Observer, 11 February 2012
The equation itself wasn’t the real problem. It was useful, it was precise, and its limitations were clearly stated. It provided an industry-standard method to assess the likely value of a financial derivative. So derivatives could be traded before they matured. The formula was fine if you used it sensibly and abandoned it when market conditions weren’t appropriate. The trouble was its potential for abuse. It allowed derivatives to become commodities that could be traded in their own right. The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended.
Phi Beta Iota: For some time now we have been articulating a concern about the government’s ignorance of computational mathematics. This is part of the new craft of intelligence and financial as well as Internet counter-intelligence. The full article is an extraordinarily understandable and complete review of the role that mathematics, combined with the absence of integrity, played in bringing down the world economy. What the article does not emphasize is that it was government ignorance, government apathy, and government complicty that allowed the global financial catastrophe to happen despite 30 years of continuing warning.
See Also (by the professor author of the article above):
In Pursuit of the Unknown: 17 Equations That Changed the World (US Hardcopy 13 March 2012)
Five Equations that Changed the World: The Power and Poetry of Mathematics (1996 precursor by Michael Guillen)
Introduction To Computational Mathematics (2008, outrageously priced)