After receiving an education in mathematics, Cathy O’Neil obtained a position with a hedge fund where she put her knowledge to use. Their business was scraping money out of ‘market inefficiencies’ using mathematical models. O’Neil entered the business shortly before the market crash of 2008 and had an inside perspective on the disaster, and got to see the role that models played in causing it. As the market moved towards collapse, she had a realization: the models they used relied on historical data to predict what would happen next, but they fall apart when the pattern stops repeating predictably. So even when things started to turn the models kept chugging along as normal, optimizing profits for the short term.
O’Neil states that one of the central reasons for the financial crisis was speculation on mortgage securities. She specifies that the risk models attached to these securities were at the heart of the WMD feedback loop. The assumption made by banks was that the risk was being evaluated by professionals who had the best interests of the economy at heart, but in fact the risk models were just a smoke screen to cover up the true level of risk in the securities being sold. There was a lot of money to be made in simply keeping the banks happy and keeping the market rolling, even as it started to roll downhill.
When the market collapse became mainstream, it became clear that the money produced by these WMDs didn’t come from nowhere, they came from people, people who were now suffering because of the meddling of mathematicians. In the aftermath of the financial crisis, it became clear to O’Neil that no lessons had been learned in the world of finance. This, she says, is what caused her to become disillusioned with WMDs.
The biggest thing I took away from this chapter is that it is apparently remarkably easy for people in the world of finance to lose perspective of what all of the money they handle means. The profits they make are made off of people and they can cause real harm when they scrape the nickels and dimes. Frankly, it disgusts me that the economy functions on blatant disregard for human suffering, and that no matter how many financial crises we have no lessons will be learned other than how to jump through new loopholes.
