LECTURING BIRDS ON FLYING
For the past few decades, the financial world has often displayed an unreasonable willingness to believe that ‘the model is right, the market is wrong, ‘ in spite of the fact that these theoretical machinations were largely responsible for the stock market crash of 1987, the LTCM crisis of 1998, the credit crisis of 2008, and many other blow-ups, large and small. Why have both financial insiders (traders, risk managers, executives) and outsiders (academics, journalists, regulators, the public) consistently demonstrated a willingness to treat quantifications as gospel? Nassim Taleb first addressed the conflicts between theoretical and real finance in his technical treatise on options, Dynamic Hedging. Now, in Lecturing Birds on Flying, Pablo Triana offers a powerful indictment on the trustworthiness of financial theory, explaining—in jargon-free plain English—how malfunctions in these quantitative machines have wreaked havoc in our real world.
Triana first analyzes the fundamental question of whether financial markets can in principle really be solved mathematically. He shows that the markets indeed cannot be tamed with equations, presenting a long and powerful list of obstacles to prove his point: maverick unlawful human actions rule the markets, unexpected and unimaginable events shape the markets, and historical data is not necessarily a trustworthy guide to the future of the markets. The author then examines the sources of origin of many prevalent theories and mathematical dictums. He details how the field of financial economics evolved from a descriptive discipline to an abstract one dedicated to technically concocting professors’ own versions of how such a world should work. He goes on to explain how Wall Street and other financial centers became eager employers of scientists, and how scientists became eager employees of financial firms. Triana concludes with an in-depth discussion of the most significant historical episodes of theory-caused real-life market malaise, with a strong emphasis on the current credit crisis.
In the end, Lecturing Birds on Flying calls for the radical substitution of good old-fashioned common sense in place of mathematical decision-making and the restoration to financial power of those who are completely unchained to the iron ball of classroom-obtained qualifications.
Содержание
Foreword xi
Preface: An Evening at NYU, Taleb’s Article, and a Credit Crisis xix
Mathew Gladstein’s Complaisance xliii
Essentials
Chapter 1 Playing God 3
* It’s tough to model human action * Finance is not as religious as physics * Black Swans make things harder * The markets are not Normal and the past is a faulty guide * Should we care that theorists persist? * Chapter 2 The Financial Economics Fiefdom 29
* Virginity matters * When describing reality was okay * It’s the incentives, stupid * Many obstacles to reform * Heeding Fischer Black’s message * Chapter 3 Quant Invasion 59
* Machine learning comes to finance * It’s a computational thing * Models live here, too * Quant punting * Interesting enough for a movie * Critique
Chapter 4 Copulated Nightmares 93
* Abrupt reform, if not so much prison * Modeling death * The 2005 pre-warning * Rating us into hell * A disapproving grin * Chapter 5 Blah Va R Blah 127
* Insalubrious charlatanism * Tracking a true culprit * Credit truths * A long rap sheet of evidence * The police are in on it * Chapter 6 Blue is not Green 161
* Lehman did die * Anything is possible * Buffett versus the Black Swan * Stubbornly holding the theoretical fort * An end to indoctrination * Chapter 7 The Black-Scholes Conundrum 177
* Once upon a time at MIT * Frowning, not smiling * How Black was that Monday * A devastating KO * The Taleb & Haug critique * Conclusions
Chapter 8 Black Swan Deceit? 245
* The tired ‘perfect storm’ alibi may be a facade * Indoctrinating clients and investors * The unseemly marketers of academic dogma * Do as I say, not as I do * Glorifying complexity * Chapter 9 An Unhealthy Yearning for Precision 267
* Dangerous voluntary enslavement * Let freedom ring * Normality can kill you * A VIXing issue * Protect those derivatives * Chapter 10 We Need Fat Tony 297
Finale Should The Nobel Prize in Economics Be Eliminated? 305
Notes 319
Acknowledgments 335
About the Author 337
Index 339
Об авторе
PABLO TRIANA has successful derivatives ex-perience at all levels: on the trading floor and as a professor, consultant, and author. He is a frequent contributor to business publications, including the Financial Times, Forbes.com, Breakingviews.com, and Risk magazine, among others. Triana is also the author of Corporate Derivatives. He holds a master of science from the Stern School of Business, New York University, and a master of arts from American University.
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