Mark Hannam
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Do the Math

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The Doubly-Excluded:
consumer credit regulation in the UK


Corporate Governance: origins and challenges

Proposals for a price cap on high cost short term credit

The Need for Roots?

Syria: the Economic Implications of the Civil War

In Praise of Non-Bank Finance

The Price of Money

Numbers 4 Good

Borrowing Freely

Sceptics Knock Success

Life, Liberty and Access to Credit

Osborne's Banking Reforms: A Hedge Too Far

Always Spend Wisely ....

A Truly Ethical Foreign Policy

Southern Africa: 2020 Vision

Mervyn Turns a Tidy Profit

Private Banking for the Poor

Teaching Jurisprudence in Namibia

George - Don't do that!

Do the Math

Two Cheers for the Walking Wounded

That's Fair Enough

What Crisis?

How to Stop the Next Bubble

Muhammad Yunus

Rethinking Risk

Fifty years ago in May 1959 scientist and novelist CP Snow gave his famous "Two Cultures" lecture, arguing against what he saw as the divide between literary and scientific intellectuals. Snow worried that their mutual incomprehension made for bad policy, and that not enough was done to harness the benefits of science for the world's poor. He did not advocate government by technocratic elite, but he thought that politicians were insufficiently educated for their responsibilities. Their scientific illiteracy, he said, made them prone to bad decisions, often on the basis of bad advice.

If Snow were alive today he would draw his distinction somewhat differently. Among the policymakers, political advisers and public intellectuals there lies a new, equally dangerous divide; one all too clear in the recent financial crisis. It is between the numerate and the innumerate.

Very few people understand arcane theories of maths, or the complex models of statisticians and econometricians. But policymakers do need to understand basic concepts of risk: what it is, how it is measured and how it can be managed. This lies at the heart of many contentious debates, from the future of nuclear power and pension deficits to the management of epidemics or demographic changes. And it's key to the regulation of the financial sector, and monetary and fiscal policy.

This is a theme Snow would have found familiar- indeed he dealt with it in a lecture at Harvard in 1960, when he described the British government's wartime decision to carpet-bomb German cities, targeting houses not factories. Churchill adopted this strategy on the advice of Lord Cherwell, his personal scientific adviser. But the strategy failed, as other experts warned it would, because Cherwell got his statistics wrong.

Snow noted two important factors leading to the mistake. First, the decision was taken quickly and in secret, with only a small number of people involved. This was necessary, given the sensitivity of the decision, but resulted in a lack of proper scrutiny of the advice. Second, Cherwell's position as Churchill's friend meant that his influence was disproportionate to his expertise. Snow's view was that until politicians acquired a better grasp of scientific issues, they would continue to take important decisions on the basis of poor advice from favoured advisers. And much the same seems true today of decisions involving risk.

We do not want our politicians to defer to the highly numerate, whether nuclear engineers, bankers, actuaries or hedge-fund managers. Government by mathematician has no appeal. But if our leaders are to make good decisions they need to be able to decide which advice to take and this requires basic competence in maths.

The same is true for other senior decision-makers. If executives in large financial firms, central banks and regulators had grasped the risks being taken right under their noses, we might have avoided the worst of the current economic mess. RBS chief Fred Goodwin wrote in the bank's 2006 annual review: "Sound control of risk is fundamental to [our] business... Central to this is our longstanding aversion to sub-prime lending, wherever we do business." One wonders how much he understood of what was going on in his own bank.

Similarly, the Bank of England observed in April 2007 that there were problems in the US sub-prime mortgage market and noted that if credit quality deteriorated in a more significant market there could be more serious consequences. The Old Lady, it seems, did not understand how much the British banking system was already exposed to US sub-prime debt, nor how significant this market was for the financial system.

As we now know, those charged with advising governments about managing financial risks mostly went along with the central bankers who declared inflation dead. Politicians were happy to say the same about boom and bust. Bank executives now stand accused of recklessness; most economic policymakers stand accused of credulousness.

Despite the failure of Churchill's carpet-bombing strategy we did go on to win the war. But we should not assume that we will always be so lucky. As CP Snow explained 50 years ago, careless maths can cost money and lives.

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© Mark Hannam 2009

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