Financial mathematics : “I was accused of having brought the wolf into the sheepfold “

Professor of mathematics at the Sorbonne university (born of the merger of Paris-IV and Paris-VI) and at Ecole polytechnique, Nicole El Karoui launched, in 1990, a DEA — become a master 2 probabilities and finance at the university, convinced that mathematics would revolutionize the finance market.

Ten years after the fall of Lehman Brothers, it returns to the origins of this training a unique and famous, as well as on the impact of the subprime crisis on the course and on the responsibility of scientists in the economic and social world.

You are a mathematician, how did you come to finance ?

Nicole El Karoui : at the end of the 1980s, I was in a period of transition in my career. While the Ecole normale supérieure [ENS] from Fontenay-aux-Roses [Hauts-de-Seine], where I was teaching was to move to Lyon, I managed to get a position of teacher-researcher at the university of Paris-VI. I already had fifteen years of experience in teaching and I wanted to have a contact with the labour market.

I got an internship at the research center of the Company bank (before its integration with BNP Paribas). I had a culture of “citizen” of the economy. And I discovered a new area of activity in finance, which issues theoretical appeal to the brownian motion (mathematical description of the random motion), that is to say, exactly what I was specialist.

What was the economic and political context at that time ?

The deregulation of the economy had been initiated in the United States. It was the beginning of the process of financialization. The basic parameters, exchange rates, credit, etc, did not cease to ” float “, to fluctuate. The future then became highly unpredictable, and new financial products, insurance against the risk of market, were created and managed in specialized markets.

In France, the socialist government has delayed the entry into this new era until the late 1980s. Sometimes a great it revolution : the small PC [personal computers, personal computers] are radically changing the landscape, competing with the ” big IBM “. This is the time when the computer revolution hit the bank.

New financial products have focused on high-tech computer, ranging of the theory is the more modern of the likelihood of their translation to digital and algorithmic. Has the Company bank, I realized that mathematics could help to solve the practical problems of this finance, and above all offer new opportunities for students. The banks were looking for a very good theorists of probability were familiar with the finance market.

I suggested to my laboratory of mathematics at Jussieu [in Paris] to create a training master 2 (formerly DEA) that would combine mathematics and finance. This initiative has not been unanimity in the world of the mathematicians, who have accused me of having brought the wolf (finance) in the fold (of the mathematicians).

What was the profile of the first students of your master ?

At the beginning, we had only a dozen students, from Bridges and pavements or the Polytechnic, where I was appointed professor in 1997. At this time, the market finance is taught in business schools. His entry to the university through a laboratory of mathematics guarantees the scientific level of our students.

For ten years, our master worked in the style of ” start-up “. It was both innovative and exciting. Finance recruiting our engineers and “quants” (quantitative analyst) at rates between 20 % and 30 % higher than that proposed in the industry. In 1995, we had thirty to forty students each year. Other scientific universities are allowed to open the same type of training.

Why the “quants” that you formed, were also searched ?

What has made their success, it was their solid training in mathematics, their curiosity, their ability to translate the problems into a chain from theory to practice. The quality of our master was soon recognized in France, but also in London and New York. His fame was built thanks to the networks of the alumni. And then the Wall Street Journal devoted a long article in 2006.

Applications have soared in the 2000s, what happened ?

There has been a runaway for the finance in the scientific world, because there were a lot of new problems, innovative solutions were tested very quickly. The unit of time in these markets was very different from that of the industry.

After the bursting of the Internet bubble, in 2000, the finance market is industrialized. The bank was recruiting a lot, the salaries of our “quants” have further progressed, those of traders have skyrocketed. I alertais my students by telling them that, if after a few years, the job is not the passion more, there should be no hesitation to change, leaves to earn less. Not always easy for young people to resist this environment where money is dematerialized as in a game of Monopoly.

The positive aspect is that all of this has shown to young people than the opportunities of the sectors of mathematics and physics at the university was not merely to education or to research.

What is the crisis of 2008 has changed for your master ?

The 2008 crisis has of course had a strong impact on the master. For several years the major banks, in particular the French, have stopped recruiting. The opportunities are diversified, especially to support trades, such as accounting, the board — the major consulting firms have now all teams of “quants” —, or digital.

There has been an impact of “ethics” on the master, especially in the beginning. Some students explained to me that they did not dare to tell all around them that they had the finance. The crisis has strengthened considerably the regulation, and has amended certain rules governing the operation of markets.

On the teaching plan, we have adapted the program, with new courses more oriented markets and regulation, which we have integrated impact. Taking account of this evolution has induced computer problems and considerable technical, typical of the skills of the ” quants “, including in respect of coverage of risks of insurance products against the risk of market, but also the role of speculators and their impact on the supply and demand — which a priori was not part of the problem ” as “.

What have been the lessons of the crisis for the mathematicians ?

The 2008 crisis is primarily a crisis of finance, and only partially the modeling. It was allowed to interrogate the role of the scientist in the economic and social world. I’ve never taught my students the speculation or prediction, for it was not the object of the activity of futures markets. Mathematics were used to make models of coverage of risks in everyday situations, not how to manage situations of bubbles or overheating markets.

The change of organization in the United States, the origin of subprime mortgages, which led to the crisis, has encouraged the development of insurance products is very complicated, not well controlled ; as long as this sector was earning a lot of money, the reserves methodologies of the “quants” had no impact.

How are trained today “quants” ?

Finance, with its new currency and its new spaces ” online trading “, is in the process of making his new revolution, and it will not be less technological. Let us not be without us, and anticipate future risks, in particular in the junction finance-big data.

For applications, the “big data” plays today the same role of attractiveness (wage offers) that the financial years of 2000. This has a real impact on the nominations. Students with a double competence in finance-big data are increasingly in demand. The current officers of the master have already incorporated this change in the training.

I do not believe that we can model globally for long time phenomena ” social “, because the wealth of human societies is to learn quickly and therefore permanently change the universe that one would wish to model. The first lesson for me is that of a great modesty about the contribution of math, learn to analyze less naively the development of new areas, such as big data and its derivatives. And at the same time, without math it would be much worse… Clearly, we have been very naive.

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