This is a fascinating and understandable short article about the Black-Scholes equation which was the underpinning for the massive growth of financial derivatives. I had to read the article slowly, and even print it out so that I could easily go back and forth in it, but I liked it. And I loved this:
Despite its supposed expertise, the financial sector performs no better than random guesswork. The stock market has spent 20 years going nowhere. The system is too complex to be run on error-strewn hunches and gut feelings, but current mathematical models don't represent reality adequately. The entire system is poorly understood and dangerously unstable. The world economy desperately needs a radical overhaul and that requires more mathematics, not less. It may be rocket science, but magic it's not.
Feels like it, though, doesn't it?
2 comments:
Most of Wall St *is* magic, though. People have been trying to figure out the "magic" and quantify it for decades. And no one has, nor ever will.
There are two things these quants keep forgetting: imperfect knowledge and "people". Folk do strange things for the most arbitrary of reasons; and no one can have perfect knowledge of a company or a market.
You can guess a lot, and even - as Black-Scholles does - measure some of the market. But at the end of the day, for most people, it's a crapshoot whether you're better off going to Vegas or Wall St.
It works better if you aren't playing near the edges. Problem is, the road moves and it's not apparent when the edge is now much closer.
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