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Saturday, April 28, 2012

Financial Trading 101... NOT!

"The year after Myron Scholes won the Nobel prize, his hedge fund crashed."
and,
"Black-Scholes changed the culture of Wall Street, from a place where people traded based on common sense, experience and intuition, to a place where the computer said yes or no."
-- from yet another article on how the infamous Black-Scholes formula brought near-ruin to the financial system:

http://www.bbc.co.uk/news/magazine-17866646

The article is by Tim Harford, but he ends quoting Ian Stewart:
"... for Ian Stewart, the story of Black-Scholes - and of Long-Term Capital Management - is a kind of morality tale. "It's very tempting to see the financial crisis and various things which led up to it as sort of the classic Greek tragedy of hubris begets nemesis," he says.

"You try to fly, you fly too close to the sun, the wax holding your wings on melts and you fall down to the ground. My personal view is that it's not just tempting to do that but there is actually a certain amount of truth in that way of thinking. I think the bankers' hubris did indeed beget nemesis. But the big problem is that it wasn't the bankers on whom the nemesis descended - it was the rest of us."
 What I can't help but wonder, is whether we've truly learned anything through all this... or, are we essentially in the midst of repeating the whole process all over again????

1 comment:

eminimethods.com said...

I think this issue has rather little to do with any mathematical formula.

It's the issue of what is known as "moral hazard" and I refer everyone to Wikipedia for more.