Extreme Events in Finance

Chapter 25Credo Ut Intelligam^*

Henri Bourguinat¹ and Eric Briys²

¹Department of Economics, University of Bordeaux IV, Bordeaux, France

²Cyberlibris, Brussels, Belgium

25.1 Introduction

During the tenth century, Saint Anselm of Aosta, Archbishop of Canterbury, pointed out in his address on the existence of God: “For I do not seek to understand in order to believe, but I believe in order to understand.¹” In 1994, the French writer André Frossard, a friend of Pope Jean Paul II, aptly reformulated the famous saying: “Faith is what enables intelligence to live above its means.” André Frossard surely did not imagine that one day his mischievous pirouette would be diverted and applied to the theory of finance: “Faith (in its models) is what enables the theory of finance to live beyond its means (disconnected from reality).”

25.2 “Anselmist” Finance

Just like their cousins the economists, practically all financial theorists have adopted an “Anselmist” posture; they believe in order to understand. They believe in their models, so they expend countless hours refining and mathematically schematizing. Their addiction to models would not be essential if the consequences remained confined to their ivory towers. Unfortunately, the academic word has been taken into ever greater account, and theoretical models feed into the thoughts and actions of our quotidian practitioners and governing authorities. The situation is disconcertingly ironic. For once, theory and practice enjoy neighborly ...