The Brownian virus: its 10 key ideas
10 years after the financial crisis: 10 key ideas to understand for avoiding a future crisis.
In a series of papers (2008, 2009, 2010, 2011 and 2012), I proposed a cognitive analysis of the financial meltdown, termed “Brownian virus”.
Topic
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New way of thinking
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Consequence
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1. Accidental fall? |
It was not a failure of prediction, but a failure of predictability based on the Brownian / Gaussian representation of risk. | The classical (econometric) view, which consists in separating “trend” (the phenomenon) and “noise” (the residual chance) must be re-examined. |
2. Securitization | The Brownian / Gaussian representation of risk transformed trashy things in pure gold. The magical trick came from the smoothness of random: the continuity assumption. | The diversification and the tools of financial engineering techniques, according to the continuity assumption, must be re-examined. |
3. The Brownian virus | The subprime crisis is firstly and mainly a crisis of knowledge: the way of thinking – and ill thinking – the uncertainty. | Any diagnosis of the crisis is not complete if it doesn’t include this epistemological cornerstone: the representations of uncertainty embedded in the financial theories. |
4. The mathematical expectation of the speculator is zero. | The virus B enters finance with Jules Regnault (1863) and Louis Bachelier (1900) first for ethical reasons. | The classical ethical scheme separating the “normal” market regime and the “irrational exuberance” regime is a cognitive effect of the virus B and must be re-examined. |
5. Majesty and misery of the American school of finance | The American choice of the Brownian representation is not technical but ideological. | The risk models and risk numbers can be used only when there is no risk. The Black-Scholes world is a risk-free world. |
6. Lethal chance | The Brownian representation presses banks to take more risk. | The whole financial system relied on the rating techniques. The rating techniques relied on the Brownian representation. |
7. The formula that killed Wall Street | The non-Brownian nature of randomness flawed the techniques of diversification | The classical statistical notion of correlation must be re-examined. |
8. Pandemic diffusion | The Brownian representation was a strong incitation to increase risk. | The rating agencies have to replace the Brownian representation inside their rating techniques. |
9. Dr Greenspan and Mr Hyde | Incestuous relationship between the invisible hand and the Brownian representation. | It is of an absolute necessity to renew the conceptual framework of the financial regulation. |
10. Morituri | Other types of probabilistic models existed yesterday and exist yet today. | The risk management tools must take account of the shape of the risk, and not only the magnitude of the risk (volatility). |

OpenEdition vous propose de citer ce billet de la manière suivante :
Christian Walter (3 novembre 2017). The Brownian virus: its 10 key ideas. EpistemoFinance. Consulté le 18 juillet 2025 à l’adresse https://doi.org/10.58079/ogvm