Slide 1

The Financial Laboratory, aka Financial £aboratory Club, was a £1.9 million limited liability partnership conducting joint research into financial risk management over 1997 and 1998.  The Financial Laboratory members were BZW, The London Stock Exchange, Royal & Sun Alliance and Z/Yen.  The programme manager was the Ministry of Defence's DERA (Defence Evaluation and Research Agency), Europe's largest research and development organisation with a turnover of £1.1 billion.  Supporting organisations included Silicon Graphics, the Worshipful Company of Information Technologists (a City livery company), COMAX Secure Business Services, City University and City University Business School.

The Financial Laboratory members' contribution of £1.2 million was augmented by a £750,000 award for "The Use of Synthetic Environments for Risk Management" by the Department of Trade and Industry in a Foresight Challenge recommendation on 21 June 1996 by Sir Robert May, the Government's Chief Scientific Adviser and Head of the Office of Science and Technology.  The Foresight Panel rated the science `alpha'. There was significant press coverage (e.g.  Financial Times 1 July 1996 and 16 January 1997) in advance of the research.

The Financial Laboratory used military technology to tackle the problems posed by financial risk.  Risk management is increasingly seen by bankers and other financiers as the core discipline of most financial service companies.  Leadership in qualitative and quantitative risk management is essential to staying at the forefront of the financial markets.  Financial regulators nationally and internationally focus on risk management processes in setting standards, trading limits and capital adequacy requirements.  Recent high-profile risk management failures, such as Barings, Daiwa, Metallgesellschaft and Sumitomo, increase the urgency of applying advanced techniques to a complex and vital area.

The Financial Laboratory exploited technologies in regular use in military environments, such as virtual reality, supercomputing, secure networks, signal analysis, psychology, heads-up displays and operational analysis, on some of the leading edge problems in finance, e.g.  interest rate prediction and trade error detection.  The Financial Laboratory research programme consisted of five areas: 

  • visualisation of financial environments - using virtual reality and computer graphics to provide real-world interaction with abstract financial markets; 
  • psychology of risk-taking - examining the selection, training, motivation, stress and other psychological factors on decision-makers; 
  • group dynamics - developing war-gaming techniques for situations such as bond auctions; 
  • financial mathematics - exploring the capabilities of algorithms from domains such as weapon targeting and radar signal processing in financial prediction; 
  • information technology - developing leading-edge applications with technology such as supercomputers or network firewalls to demonstrate likely advances.

The programme linked technology for visualisation to a series of projects which simulated an abstract world of markets for direct interaction.  Nine specific projects were agreed as the basis for supporting the programme - intraday anomaly detection, optimising dealer performance, advanced risk evaluation, government debt auctions, interest rate modelling, capital requirements, networks, public access and common risk visualisation environments.

 

More information:

PropheZy

Michael Mainelli, "Risk/Reward In Virtual Financial Communities", Information Services & Use, Volume 23, Number 1, IOS Press (2003) pages 9-17.

Michael Mainelli and Martin Dooney, "Military Minds Train on Financial Targets", Investment & Pensions Europe, page 14 (March 1997).

Ian Harris, "Assets in Wonderland" Berkely Morgan Money Matters (1996/1997).

James Flint, "Market Wars", Wired UK (Dec 1996).