Feb 21, 2011

The limits of numbers

Number crunching, a useful practice in the financial sector – and the world beyond. I like it as an expression, too. But over-relying on numbers bears a danger. You are only able to measure what translates into numbers. The world, however, is much more complex as we witness time and again – and clearly illustrated by another crunch, the 2008 credit crunch. Hence, for a safer financial sector we have to look beyond numbers.

Partly, financial services companies and regulators need to change the way they see the world. A worldview relying on computing is, of course, much easier to understand, predict and monitor. Accepting a complex world in which often intangible and interrelating processes influence the outcome is something else. As Rober J. Shiller in Irrational Exuberance (2005: 31) states, ‘this ambiguity [i.e. that many events are determined by a plurality of factors] is unsatisfying to those seeking scientific certitude, especially given that it is so hard to identify and isolate the precipitating factors to begin with.’ A sheer challenge, then, to adapt well-entrenched convictions about ‘measuring’ the world to the reality on the ground. But hey, a challenge is something that should make financiers and regulators tick!

Subsequently, there lies another challenge ahead. How to include power? How to include politicians’ (un)predictability in the search for economic solutions? And especially how to avoid that it all boils down to numbers again, obscuring, once more, difficult to measure aspects involved? Regulators and financiers I’ve met after the 2008 crisis were now aware that there was more to it than formulas and mathematical models. Cultural practises and social conventions, they realised, were certainly of influence. However, I noticed that they had a tendency not to take these aspects into account (because they were considered too intangible to include in their policies) or to try to translate it into numbers (as this was the main language they understood). They, so it seemed to me, didn’t seize the opportunity to bring it to another level. Maybe the biggest challenge, then, is to convince actors involved that part of their responsibility lies in taking time to rethink new solutions – and use and integrate insights from a variety of disciplines, such as economics, sociology, anthropology and psychology.