Linear and non-linear models and the financial collapse

In this article the mathematician Ian Stewart considers the responsibility of the linear mathematical models widely used by ‘quants’ in investment banking for the credit crunch. He points to the unrealistic and ideal assumptions of the Black-Scholes equation, used to justify more and more derived financial products, in comparison with the volatility of financial markets. As an alternative Stewart recommends the development of more ecological agent-based models of complexity which more closely represent the fluctuations of trading owing to traders’ sometimes herd-like behaviour.

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