Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Tue, 10 Aug 2010

Has the greatest financial risk gone away?

I have long argued that the greatest global financial risk is not toxic derivatives or bad loans – it is the unnerving possibility that P=NP. P≠NP is a conjecture about an abstruse problem in mathematics, but too much of computer security depends on it. It is likely that if P=NP, then many financial assets that are recorded as electronic entries could suddenly evaporate because those entries could all be hacked. Since almost all financial assets today are in electronic form, that would be the end of finance as we know it.

During the last couple of days, a purported proof that P≠NP has been circulating on the web (hat tip Bruce Schneier). The hundred page paper by Vinay Deolalikar of HP Research Labs, Palo Alto utilizes and expands “ upon ideas from several fields spanning logic, statistics, graphical models, random ensembles, and statistical physics” to obtain the purported proof. We still do not know whether the proof is correct (see here and here)

It reminds me of the early days of the initial claims of Wiles’s proof of Fermat’s last theorem or Perelman’s proof of the Poincare conjecture. Everybody agrees that it is a serious proof, but nobody knows whether the proof is right. But if Deolikar is right, the biggest financial risk of all has gone away.

Posted at 17:38 on Tue, 10 Aug 2010     View/Post Comments (3)     permanent link