The Midas Formula
(Neanderthal, 2,182
Points)
on 2/27/11 at 8:56pm
Here’s a short documentary to end the weekend; chronicling the discovery and use of the Black-Scholes model from its infancy to LTCM’s collapse, this BBC production sheds some light into the minds of the academics who pursued it, the traders who loathed and then praised them, and how it changed the way options are being traded ever since.
The first few parts are a bit dragging though, somewhat over-dramaticized, and the narrator made me sleepy but all in all its pretty good stuff.
Videos after the jump.







Comments
Meanwhile in his letter to
Meanwhile in his letter to investors Buffet calls the Black-Scholes formula silly and points to the fact that he made money options trading through the crisis.
Trust the Midas touch!
Trust the Midas touch!
If I had asked people what they wanted, they would have said faster horses - Henry Ford
I'll watch this tomorrow,
I'll watch this tomorrow, looks interesting.
The Black Scholes formula is a model for pricing only, just like DCF. As with any model/theory, the assumptions are everything. Often, the assumptions (or the market's inputs as far as assumptions) are wrong, so you can find many different ways to profit if you understand the model. I love options, so useful. :)
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monkeysama wrote: Meanwhile
Meanwhile in his letter to investors Buffet calls the Black-Scholes formula silly and points to the fact that he made money options trading through the crisis.
Meanwhile in this comment I call Warren Buffett silly and point out to him being a hypocrite who just talks his own book.
People like Coldplay and voted for the Nazis, you can't trust people Jeremy
Hey monkeysama, can the
Hey monkeysama, can the failure of Black-Scholes get any traction with you that econ/finance is not science, not precise, etc.?
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econ wrote: econ/finance is
econ/finance is not science, not precise, etc.?
Isn't this generally accepted by almost everyone everywhere?
If I had asked people what they wanted, they would have said faster horses - Henry Ford
Econ, you misunderstand.
Econ, you misunderstand. There may be things that are not precise in economics, but I don't take it as writ that we can't strive to get there. It's not like the speed of light, there's no definite proof that we can't reach it.
For example, I'm willing to be there are 100s of dudes right now trying to square away black swans into the B-S theory. And that's a beautiful thing.
happypantsmcgee wrote: econ
econ/finance is not science, not precise, etc.?
Isn't this generally accepted by almost everyone everywhere?
Unfortunately, I'm not convinced. After spending one year in an Econ PhD program, I suspect most economists like to see themselves as scientists, who seem to think that economics can be as precise, scientific, and quantitative (or is it quantifiable, I'm not really sure, I'm honestly drunk) as "real" sciences (like physics). They should really read Hayek's "The Prentense of Knowledge"...
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monkeysama wrote: Econ, you
Econ, you misunderstand. There may be things that are not precise in economics, but I don't take it as writ that we can't strive to get there. It's not like the speed of light, there's no definite proof that we can't reach it.
I suspect we can't get there. Seriously, read and understand F.A. Hayek's Noble Prize Speech/Lecture. I'm not saying you have to agree with him... I just think he lays out the arguments pretty well...
For example, I'm willing to be there are 100s of dudes right now trying to square away black swans into the B-S theory. And that's a beautiful thing.
I'm not 100& sure what you're saying. Please explain (and, for some strange reason, I honestly think I agree with you on this point, even though I'm not even sure yet what you're saying...).
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econ wrote: monkeysama
Econ, you misunderstand. There may be things that are not precise in economics, but I don't take it as writ that we can't strive to get there. It's not like the speed of light, there's no definite proof that we can't reach it.
I suspect we can't get there. Seriously, read and understand F.A. Hayek's Noble Prize Speech/Lecture. I'm not saying you have to agree with him... I just think he lays out the arguments pretty well...
For example, I'm willing to be there are 100s of dudes right now trying to square away black swans into the B-S theory. And that's a beautiful thing.
I'm not 100& sure what you're saying. Please explain (and, for some strange reason, I honestly think I agree with you on this point, even though I'm not even sure yet what you're saying...).
The main problem with B-S theory is that it doesn't take into account risk in a way that is satisfying - only volatility.
When the twin snakes of the Asian financial crisis and the Russian default occurred the price to hedge risk by buying options spiked and it tanked LTCM. We now understand from the latest crisis that market failures and rallies, "black swans", are much more likely than a normal probability distribution would suggest (a so called fat tail distribution is a better fit). LTCM was not taking this into account and were using past data to justify much of their buying.
The newest challenge is to somehow account for the risk associated with black swans without sacrificing too much in terms of short term gains. I think that there is a new equation waiting to be found that will square option pricing with this new interpretation of risk.
Great post. Thanks.
Great post. Thanks.
monkeysama wrote: The main
The main problem with B-S theory is that it doesn't take into account risk in a way that is satisfying - only volatility.
When the twin snakes of the Asian financial crisis and the Russian default occurred the price to hedge risk by buying options spiked and it tanked LTCM. We now understand from the latest crisis that market failures and rallies, "black swans", are much more likely than a normal probability distribution would suggest (a so called fat tail distribution is a better fit). LTCM was not taking this into account and were using past data to justify much of their buying.
The newest challenge is to somehow account for the risk associated with black swans without sacrificing too much in terms of short term gains. I think that there is a new equation waiting to be found that will square option pricing with this new interpretation of risk.
B-S equals Black-Scholes and not Black-Swan, right? I just want to make sure I know what you're saying...
In any event, read the Hayek speech...
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yeah, B-S = Black Scholes.
yeah, B-S = Black Scholes.
Then, what is a better way to
Then, what is a better way to take in risk? As far as I can tell, economists (and/or financial economists) don't have a good way to take into account risk (since nobody knows exactly what risk is). Is it undiversifiable risk? If so, how exactly do you quantify that?
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econ wrote: Then, what is a
Then, what is a better way to take in risk? As far as I can tell, economists (and/or financial economists) don't have a good way to take into account risk (since nobody knows exactly what risk is). Is it undiversifiable risk? If so, how exactly do you quantify that?
That, my friend, is the billion dollar question.
talk about an over
ambition56 wrote: talk about
uh false dynamic hedging
monkeysama wrote: econ
Leadership can be defined in two words: "Follow Me"
This is probably a dumb
chewingum wrote: This is
If someone could make a
|| But feeling good and enjoying life are prerequisites to success, not by products of it- Midas Mulligan Magoo ||
Just goes to show-you don't
Some really inane comments in
1, LTCM's main strategy was
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This was a great documentary,
illiniPride
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By the way, I want to
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In video 3, they say
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econ wrote: By the way, I
I've always thought that
If I had asked people what they wanted, they would have said faster horses - Henry Ford
Tar Heel Blue wrote: I don't
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Tar Heel Blue wrote: I don't
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Tar Heel Blue wrote: The
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happypantsmcgee wrote: I've
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derivstrading wrote: You
Tar Heel Blue wrote: All I
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econ wrote: Tar Heel Blue
I think one of the biggest
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alexpasch wrote: I think one
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Econ, stop being a slack ass
If I had asked people what they wanted, they would have said faster horses - Henry Ford
happypantsmcgee wrote: Econ,
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Besides, I like economizing
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Econ is a slackass, econ is a
monkeysama wrote: Econ is a
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http://techtv.mit.edu/videos/
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I just don't get any
Amphibia wrote: I just don't
Oops, duplicate.
Tar Heel Blue wrote: I think