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555 2013 Certificate Authority Cup International Mathematical Contest Modeling (mcm.tzmcm.cn) PROBLEM A: Mathematics and Economic Calamity The market crash of 2008 that plunged the world into the economic recession from which it is still reeling had many causes. One of them was mathematics. The financial world is not alone, of course, in depending on mathematical models that aren't always reliable for decision-making guidance. Scientists struggle with models in many fields—including climate science, coastal erosion and nuclear safety—in which the phenomena they describe are very complex, or information is hard to come by, or, as is the case with financial models, both. Those formulas, or models, are only pale reflections of the real world, and sometimes they can be woefully misleading. Despite their ubiquity, these risk models fail to take into account important forces that affect the market. Researchers are building ways to work around these limitations and prevent a repeat market crash. Yet these strategies may limit profits, making it unlikely that banks will adopt them without being forced to do so. If possible, you can redefine risk, then build a dynamic model of some principal factors of the market to monitor the triggers or symptoms to reduce the potential for surprise. Blaming the economic calamity on risk models would be an oversimplification. Other human factors—political and regulatory ones—certainly come into play. How to reduce the impact of human? In addition to the contest's format, prepare a short 1-2 page non-technical letter to the financial investment firms with your final recommendations.
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