Spring 2009

FEATURED ARTICLES

Spring 2009 Analytics

DEPARTMENTS

Inside Story

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Models & Meltdown

Given the worldwide economic meltdown that weighs so heavily on just about everyone’s mind these days, it should come as no surprise that many of the articles and columns in this spring 2009 issue of Analytics focus on the financial sector. Because the collapse of the housing market in the United States and the shaky subprime mortgages the housing bubble was built on apparently triggered the meltdown – and since behind-the-scenes mathematical models apparently emboldened institutions to make bad loans – should analytics be the fall guy in this financial fiasco?

Viewpoint

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There's Always 'Model Risk'

I would like to point out a few misconceptions from the interview with Stephen Baker in the Winter 2008 issue of Analytics. http://viewer.zmags.com/publication/d10da139#/d10da139/15]. I was struck by Mr. Baker’s comment that “...if Takriti can do that with IBM employees [model consultants’ skills for optimal deployment], other[s] ... can do the same thing with other groups of people.” The introduction to the interview went on to say that this was a concept “most famously pioneered by companies such as Amazon and Netflix.”

Forum

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Did Faulty Mathematical Models Cause the Financial Fiasco?

As we face the worst financial crisis since the Great Depression, we cannot help but ask what role mathematics played in this. Over the past 20 years the practice of finance has been revolutionized by the widespread adoption of mathematical models for pricing ever more exotic derivative securities. Mortgage-backed securities, which triggered the financial collapse, were priced using the Gaussian copula model. What would Albert Einstein have to say about all this?

Social Causes of Financial Crisis

Although there are many discussions on the economics behind the current financial crisis, there are very few discussions on the social causes of the crisis. Here we point out at least three of them. We believe that without fixing the social causes that led to the crisis, focusing on economic policies alone will not solve the current problems.

After the Meltdown

Over the past year, we have seen extraordinary economic turmoil – the most dramatic such events in many decades. An apparent correction in an over-inflated U.S. housing market combined with the collapse of a small corner of the mortgage market – subprime loans – led to a cascading chain of events, culminating in a world-wide crisis of confidence among lenders, who withdrew their funds at an unprecedented pace. Disruption in global credit markets led to financial distress and failure of major banks and financial service firms, sudden shortages of cash for businesses of all types and major declines in world stock markets. By the end of the year, it was clear that these events were triggering economic downturns in the United States and around the world. And, as we look at our year-end investment statements and listen to news reports of tight budgets, job cutbacks and disappointing corporate earnings, we might be justified in giving more than a little bit of thought to our personal financial security.

People Profile

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INFORMS President has Ambitious Agenda

When Don Kleinmuntz took office as president of the Institute for Operations Research and the Management Sciences (INFORMS; see accompanying story) in January, he arrived with a long to-do list. Among the many items on his agenda:

Corporate Profile

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General Electric Global Research Center

General Electric Global Research Center (GEGR) has been a cornerstone of GE technology for more than 100 years. It is one of the world’s largest and most diverse industrial research labs with more than 2,500 researchers located at four multi-disciplinary facilities. Headquartered in Niskayuna, N.Y., GEGR has facilities in Bangalore, India; Shanghai, China; and Munich, Germany. GEGR delivers innovated, enabling technologies to GE’s businesses that revolutionize the markets they serve. Examples of major breakthroughs over GEGR’s history include the Ductile Tungsten that enabled the commercial incandescent lamp, portable medical X-ray, the first commercial U.S. jet engine, Lexan polycarbonate, man made diamonds, MRI and digital X-ray. Home to two Nobel Prize winners, GEGR’s mandate is to identify and perform the enabling R&D for the next-generation-plus of GE’s products and services. A majority of the projects at GEGR are funded directly by GE’s businesses.

Last Word

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The Network is the Risk

Recall Sun Microsystem’s advertisement about the “Network is the Computer.” Given all the economic news – no news is good news and therefore so much news is bad news – and given the connectivity in the modern global economy, I am tempted to say that the network is the risk.

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