Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?Hardback
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- Publisher: John Wiley & Sons Ltd
- Format: Hardback | 400 pages
- Dimensions: 155mm x 231mm x 33mm | 612g
- Publication date: 9 June 2009
- Publication City/Country: Chichester
- ISBN 10: 0470406755
- ISBN 13: 9780470406755
- Edition: 1
- Illustrations note: , black & white illustrations, figures
- Sales rank: 259,700
An intriguing look at how financial models have repeatedly failed our markets, including now Leading and contrarian thinkers have been talking for years about the conflicts between theoretical and real finance. Nassim Taleb first addressed the issue in his technical treatise on options, Dynamic Hedging. Now, in Lecturing Birds on Flying, Pablo Triana moves the conversation to a narrative that anyone can follow, and explains how it is that theoretical finance can fail dramatically in the real world. The heart of the book, though, isn't about technicalities, but instead explores how widely accepted theories that are applied daily cause our world real harm. Many times, it's the quantitative models that hedge funds and investment banks use (and regulators and rating agencies embrace) that lead to market implosions. These so-called models end up offering false guidance and misplaced certainty, and sanction unsavory behavior. In fact, these models 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 big and small. Pablo Triana has been writing about the limits of these types of mathematics for several years; now he reveals exactly what this means for our markets and why blind self-enslavement to quantitative dictums puts us at great peril. Pablo Triana (New York, NY, and Madrid, Spain) has successful derivatives experience at all levels: trading floor, professor, consultant, and author. He is a frequent contributor to business publications, including the Financial Times, Forbes.com, Breakingviews, and Risk magazine, among others. His prior book is Corporate Derivatives. Triana holds a master of science from New York University, Stern and an MA from American University.
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Pablo Triana has successful derivatives experience 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.
"Triana's answer is experience honed by common sense." (FT.com, August 23rd 2009) "He makes many good points" (The-Actuary.org.uk, September 1st 2009) "...calls for a return to "good old fashioned commonsense decision making"." -Daily Express, June 4th 2009 "This book explains how it is that theoretical finance can fail dramatically in the real world." -Finanace & Management Faculty, June 2009 "The book is fizzing with ideas" -The Economist, June 29th 2009
For the past few decades, the financial world has often displayedan unreasonable willingness to believe that "the model is right, the market is wrong," in spite of the fact that these theoreticalmachinations were largely responsible for the stock market crash of1987, the LTCM crisis of 1998, the credit crisis of 2008, and manyother blow-ups, large and small. Why have both financial insiders(traders, risk managers, executives) and outsiders (academics, journalists, regulators, the public) consistently demonstrated awillingness to treat quantifications as gospel? Nassim Taleb firstaddressed the conflicts between theoretical and real finance in histechnical treatise on options, Dynamic Hedging. Now, in"Lecturing Birds on Flying," Pablo Triana offers a powerfulindictment on the trustworthiness of financial theory, explaining-in jargon-free plain English-how malfunctions in thesequantitative machines have wreaked havoc in our real world. Triana first analyzes the fundamental question of whetherfinancial 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 hispoint: maverick unlawful human actions rule the markets, unexpectedand unimaginable events shape the markets, and historical data isnot necessarily a trustworthy guide to the future of the markets.The author then examines the sources of origin of many prevalenttheories and mathematical dictums. He details how the field offinancial economics evolved from a descriptive discipline to anabstract one dedicated to technically concocting professors' ownversions of how such a world should work. He goes on to explain howWall Street and other financial centers became eager employers ofscientists, and how scientists became eager employees of financialfirms. Triana concludes with an in-depth discussion of the mostsignificant historical episodes of theory-caused real-life marketmalaise, with a strong emphasis on the current credit crisis.In the end, "Lecturing Birds on Flying" calls for theradical substitution of good old-fashioned common sense in place ofmathematical decision-making and the restoration to financial powerof those who are completely unchained to the iron ball ofclassroom-obtained qualifications.
Table of contents
Foreword. Preface: An Evening at NYU, Taleb's Article, and a Credit Crisis. Mathew Gladstein's Complaisanc. ESSENTIALS. CHAPTER 1 PLAYING GOD. 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. 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. 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. Abrupt reform, if not so much prison. Modeling death. The 2005 pre-warning. Rating us into hell. A disapproving grin. CHAPTER 5 BLAH VaR BLAH. 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. 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. 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? 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. Dangerous voluntary enslavement. Let freedom ring. Normality can kill you. A VIXing issue. Protect those derivatives. CHAPTER 10 WE NEED FAT TONY. FINALE SHOULD THE NOBEL PRIZE IN ECONOMICS BE ELIMINATED? Notes. Acknowledgments. About the Author. Index.