In my last blog I talked about how things that at first seem intimidating usually do not turn out to be as scary.

I have been faced with this challenge at university and now in work.

When people ask me what I do, I have to think really carefully about how I answer.

Mentioning the word “pensions” rarely goes down well. People often take on a sort of glazed over expression. And even if they invite me to go into more detail (very rarely!), it’s not hard to see that they’re really hoping I won’t.

However, if I’m feeling particularly masochistic, I’ll occasionally soldier on and mention derivatives.

This will usually affect a person’s perception of me in one of two ways. They will either associate derivatives with the derivatives they learnt about at school in maths classes (which means I’m perceived as even geekier than when they thought I only dealt with pensions), or they associate me with unscrupulous individuals like Nick Leeson, and suddenly I’m a villain.

In either case, it’s not a good outcome.

Perhaps I should be used to this kind of reaction to my chosen career path. As a maths graduate, I’m well used to an admittedly more positive, but still politely ‘closed-off’ reaction.

Humanities, classics, and even science and engineering students may be asked about what they are studying or the subject of their dissertation. In my experience at least, the same is rarely true for maths. Much like “pensions” or “derivatives”, people just seem to shut down when mathematics is mentioned. “Oh, you must be really smart”, “I was never any good at maths at school”, or “It’s too complicated for me” are all typical responses.

I wonder if the barrier to entry for maths is the numerous dull and often pointless calculations we are subjected to on the school curriculum, or the abundance of Greek letters and unwelcoming symbols present in the vast majority of mathematical texts. By many academics, mathematics is actually viewed as a language in itself. Looking at the below example this makes a lot of sense:

This is the same statement in plain English:

*Take two numbers which can be written as fractions. If the sum of your two numbers is a whole number, and the product of your two numbers is a whole number, then your original two numbers must both be whole numbers too.*

Feel free to test this theorem out for yourself!

On seeing the first sentence – the equation, many people would dismiss it as completely incomprehensible. However, although the plain English version is less concise, I think we can all agree that it’s much easier to understand.

This use of the mathematical language to describe concepts more quickly and concisely is very similar to the widespread use of jargon in the derivatives industry. It makes sense, within an industry, to develop words and phrases to express information to one another more simply. However, it is dangerously easy to forget that most people aren’t familiar with all this jargon. Attempting to use it without proper explanation to express ideas to others will most likely result in them feeling that it is too complicated to understand, perhaps even leaving them too uncomfortable to ask questions.

As an industry, we must view this as a failure on our part. We need to be as open and accessible as possible to our clients, prospective clients, and frankly anyone else who takes an interest. Of course, I’m not saying that the underlying maths behind derivatives will always be easy for a layman to understand, but nor do they need to understand it at every level of detail – just as one does not need to understand all the workings of an aeroplane to be happy to fly in one. What is important is that we are able to provide a suitable level of understanding of the purpose of derivatives in hedging, how they function, the associated risks and how these are managed, and, importantly, ensure that more people are comfortable with them.

As I have seen in practice this results in scary things becoming more accessible to those that may have been intimidated by them in the past…