One formula to ruin them all

I do hope Professor Armin Falk of the University of Bonn was paid exactly what it was worth for this study showing that money, or even the thought of it, can makes us high.

It's hard to put a price on such knowledge but it does provide great value for headline-generators such as myself.

"Money like a drug," the Herald headline begins and it's an apposite analogy for the times, as governments around the world inject cash into the banking system while everyone else is suffering from withdrawal (or maybe 'non-withdrawal' is better) syndromes.

Back to the study itself, which, according to the Herald story, suggests "that the human brain is innately susceptible to the illusion of wealth that money can bring".

At its core, Falk's study supports the notion that most people are distracted by headline numbers and pretty crappy at applying simple maths to reality.

But as this story on US website Portfolio.com demonstrates, sometimes investment professionals are pretty crappy at applying reality to mathematics.

You may be sick of reading about credit default swaps and collateralised debt obligations - the financial instruments copping the blame for our current little financial crisis - but the article (originally published in 'Wired' magazine) is particularly illuminating about the way financial types measure risk and how the beauty of a single formula blinded many to the ugly - statistically speaking - real world.

"They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years," the Wired story concludes. "Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all."

Now that's a real money illusion

David Chaplin

 

Photo/ Babiche Martens