By Hamish Johnston
Have rocket scientists built ‘financial weapons of mass destruction’?…
The answer is yes — at least according to the investment guru Warren Buffett, who has been warning for some time that complex financial instruments such as ‘derivatives’ are far too complicated for mere mortals to understand. Indeed, five years ago Buffett described derivatives as a “financial weapons of mass destruction“.
Now that derivatives have apparently helped bring down one of the world’s largest investment banks, should the rest of us be blaming the rocket scientists — PhD physicists and other bright sparks — who helped develop these financial instruments and the mathematical algorithms needed to make sense of them?
In an 1999 editorial, then Physics World editor Peter Rodgers weighed the pros and cons of physicists abandoning careers in research for high-paying jobs in finance. Would the raised profile of physics in society offset the loss of talented people from academia?
What Peter didn’t ask was: “What if the rocket scientists make a mess of it?”.
Avarice, not algorithms, is of course to blame for the credit crunch, but one can’t help wondering if this is the end of the love affair between physics and finance?