From Dr Peter Johnson.
Sir, Ewan Kirk’s remarks (Letters, October 21) concerning the relevance of Benoît Mandelbrot’s non-normal, fractal conclusions for financial theory and markets remind me of the Vatican’s dealings with Galileo in striving to maintain the Ptolemaic model of the solar system with the earth at the centre.
Transforming and scrubbing the data to avoid contradictory evidence using “suitably defined” scaling is common to many episodes in science as Thomas S. Kuhn made clear in The Structure of Scientific Revolutions, where the incumbents defend the prevailing scientific paradigm.
The point is that all the money spent on VaR (value-at-risk) systems and the like was money down the drain. The systems were bought because the maths of normal distributions is tractable. Even if the world is only very occasionally non-normal, the fact is that a few days of non-normal behaviour can bring us close to complete financial meltdown. This is why George Soros has put $50m into the Institute for New Economic Thinking. Finance needs to move on.
Fellow and Tutor,
Exeter College, Oxford, UK