A model makers' Hippocratic Oath

from Edward Fullbrook

Recently an article by Emanuel Derman and Paul Wlmott appeared in Bloomberg Businessweek which begins:

Whirring away at the center of the mortgage meltdown that prompted the current crisis were those theoretical constructs known as financial models. As bankers sliced and securitized mortgages, traders and investors relied on the models to calculate the bundled loans’ values and risks—risks they failed to predict.

What went wrong? As modelers, we see the fantasy of perfection as the fatal flaw seducing both developers and users.

Their article, which is one place where DeLong and Co. could begin their rehabilitation, concludes with “a model makers’ Hippocratic Oath” 

• I will remember that I didn’t make the world and that it doesn’t satisfy my equations.

• Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

• I will never sacrifice reality for elegance without explaining why I have done so. Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.

• I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

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