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Can a single formula be behind the financial crash?
It's not every day that an equation changes the world, but one made modern options trading possible - and arguably caused the financial crash.
Desh Maharaj's profile photoJane Gooding's profile photoGatto NineNineNine's profile photoBob Vendramin's profile photo
تغيرت الأرض ومن عليها وأصبح وجه الأرض مغبر قبيح
Where is albert Einstein when you needed him the most!
Interesting article, BBC, but where was that 17th century rice option trading? Running text says Japan, picture at the bottom says China.
I was thinking it was probably a group of robber-barons with unscrupulous accountants. But sure, blame math.
Interesting - shows the dangers of relying on simple measures of complex systems. The small number of factors that aren't reflected in the formula sometimes gang up on you!
Quants showed you the game when LTCM went down like the Hindenburg.
Dear BBC: I don't believe you should be using the word "maths." If it was intended you should hire an editor instead of using a spelling checker. If that's what you intended then please do a better job making up new words?
Maths is actually a more appropriate abbreviation of mathematics. Also, it is a term that the British have been using for a long time. It hardly seems appropriate to be accusing the BBC of making up new words.
+Jay Sprenkle what the hell are you talking about? Maths is a shortened word for the fields of mathematics.
+Jay Sprenkle commonly used in England.

Of course across the pound they're guilty of misspelling color and mispronouncing aluminum (I kid).
Isn't "maths" proper British usage? The two main branches do have some relatively minor divergences. Forex: "His Majesty's government view with favour..." Over here it would be "_views_ with favor..." Potato/potato.
after all its always about 0 and 1..!!!!!!!!!!!!!!
thanks for the update..! but still its about 0 and 1...!
Maybe us Brits should take out a case for copyright infringement against the Americans for use of the English language :D 
Oh, I think it would be more fun to settle it with a tug o' war match across the Atlantic.
That is amazing! Can you take a video so your you+ can see it?
Nah! Adam is right! America should start using 1337 and C++ as our national language.

Now lets get back on subject.

This article was very interesting. I have seen several articles concerning Trading and Emotion. This is the first I've seen considering Trading minus Humanity.
I can only speculate that the Black-Scholes equation introduced too much confidence as traders believed that something soulless could make better decisions then people. So they risked more.
The interesting thing from my point of view is in mathematics there in a answer for every problem. The problem with the equation has been identified. So we just need o adjust our formula. Ready for round 3?
One math formula by Quantitative Analysts, at the top of the international financial corporate cartel of global Money control, over global Food and Energy and People.... did not cause the global economic crash... by itself. It was the whole notion of a super Pyramid Monopoly of Apex Down Command And Control by any system of digital accounting, based on fiat money, controlled by the fraud of Corporate Personhood, which would cause the house of cards to fall. This is the Economy-Energy-Environment triple-knot-crisis of the 21st Century where the global financial crisis is merely a symptom of a deeper structural crisis from our faith in growing centrist Apex Down Command And Control Pyramids of Monopoly based on the Noble Lie deception of Corporate Personhood, Our super rich ,powerful and influential elites are so ideologically and welded to the fallacy of economies of scale benefit from growing the Pyramid of Corporate control, they dare not speak of or see the fallacy, any more than Jesuits could once see the fallacy of the world turning around a Pope who said the Sun turned around the Earth, because the Pope said Aristotle was blessed by God,
The modern fallacy of a super Pyramid of Corporate control over global Food, Energy and Money, is the technocratic Noble Lie fallacy now pushing our civilizations towards collapse,
One math formula was just the digital mathematical straw that broke the back of an ancient 6,000 year Pyramid organization Operating System that is now long past its sell by date. We must change the Civilization OS and escape the Plato's Cave or Pyramid hierarchy worship - now of Quantitative Analysts who hardly understand the real world beyond computer screens and maths formulae,
Think outside the Pyramind,
Welcome to PlaNEThink.
+Cole Cummings I'd left finance a couple of years before Scholes' fund crashed, but I recall the same sentiment in the analyses of that event. The idea of formula based trading without experience in the market led to disaster.

As a programmer for a mutual fund company in the 90s I can tell you that Black-Scholes and variants of it existed en masse, and it seemed every hot shot trader has his/her own special tweak to it that was going to take it to new heights.

As a tool married with other strategies it was pretty sound.
I don't know the models, but since they are mathematical I suppose prices are used and not values. Value is not the same as price. When everyone trades with models that only look at prices the value isn't taken into account. Trusting a model you pay a price without knowing if its worth it, meaning you don't know if the product has the value you expect from its price.
Price should be based on value and value in its turn is determined by the perception of people at given time, I don't think you can capture that in a mathematical formula...
There was actually a BBC documentary on this called "The Midas Formula- Trillion Dollar Bet". Watched it last year...
Im sure theres a simple equation that shows human greed = financial crash. Why do we continue to want and need more than we have? Nothings enough..which will lead to the world being more and more an evil place. Unfortunately governments will base their successes on economic growth, this will keep getting worse as long as people judge their voting on economic rather than social progress.
How does greed = financial crash? Greed = most Americans own homes, 40" HDTV (TV in every room), two cars, high speed internet, laptops. Only businesses are greedy? Not unions, not individuals? Furthest from the truth.

How do you have greed when both parties agree to the transaction? I don't give up my wealth without your giving up yours.
Is BBC blaming mathematics or blame people who following this equation? After knowing this can you do something about financial crisis here in Britain?
Let me add, there is a good book on this subject. Pricing the future by George Szpiro.
Financial things are non linear but economists & stockbrockers run behind an linear law.They do not understand that the world around them it is non linear and the cracks are the response of the stock exchange.
+Bob Vendramin every single transaction made comes down to an individuals greed. Whether its that person needing a 5th television or the person selling it to get a bonus or the salesmans manager getting a bonus for hitting targets. Businesses or governments as a whole are not to blame..its the individuals.
There were many contributors, but none as big as the deregulation of the derivatives market. Funny how the free market extremists always sweep that one under the rug.
ilya k
+Bob Vendramin owning a ln HD TV and high-speed internet and a laptop is starting to become the only way one can connect to the outside world. Not saying there isn't excess but internet is a must for my work. TV and internet also allows me to get information. That's how I get my books, music. Welcome to the digital age.
ilya k
And please stop bringing unions into every conversation. 17% national unionization isn't exactly touting a big stick. You should be more pissed at corporations pillaging money and paying zero taxes. That's a much bigger stake in the destruction of our economy.
Nothing wrong with the maths part of it. The traders abused the system just like the analogy above about the one who flew higher and higher until he went close to the sun. After the sun melted the wax holding the wings, the flying engine crashed down!
Meh, I like my greed. It motivates me to do better/more.

I suppose I could take it easy at work, just support the apps, collect a check. Instead I'm constantly working on new projects with the hope that they will pay off.

This keeps my skills fresh, which makes me a better developer.

So stop using greed like a four letter word.
+Ryan Martin I wouldn't call it greed. A person is willing to purchase the 5th TV and a business is willing and capable of selling it. Where is the greed? Both are rational (for the most part) decision makers making a purchase that benefits them mutually. We don't enter agreements for our mutual demise.
+Jurjen Verhagen is absolutely right. What makes price dramatically deviate from value? One thing that does is fraud! And what very important factor was entirely missing from this BBC report? That's right - fraud!

Anyone who doesn't believe that fraud was a major component of the financial crisis needs to go and read Matt Taibbi's articles on Wall Street's scams. It's hardly unprecedented either.
+ilya kanter so your saying your not greedy... 10 years ago people would have said you are. That's what "greed" produces.
hahaha green my surname that is so freaking cool
ilya k
+Bob Vendramin i realize you're struggling with this. Its not the 1990's anymore. Things have changed drastically even in the last 5 years. I cant afford to fall behind by not being educated or connected. You can feel free to do that if you wish. Just don't be surprised if you're left in the dust in the next 5 years
+Bob Vendramin well of course nobody would agree to any kind of demise, without looking at the whole picture. But the fact is that the world can not sustain growth for every single person to have 5 tv's. The only reason you can have that is because somebody else has to work to feed their family a bowl of rice each day (to put it in a blunt/basic fashion). Now we have idiots that think we should mine other planets rather than try to sustain our own beautiful earths resources.
A formula didn't cause a crash; the mindless sheep following a formula did.
+Ryan Martin Economics is based on scarce resources so as resources become less abundant then costs will increase thereby slowing the demand. So you are determining the world can't sustain the growth? I would suggest as "the world" decides to consume the less abundant resources the market will self adjust. People will decide to go without or purchase a substitute.

The only reason I you can have is because someone agreed to give.
+Ryan Martin thats patently untrue, and outside of soundbites there is no empirical evidence to support that claim.
ilya kranter I totally agree with you. The greed comes from the corporations expectations. I have just completed a Quantitative Analysis for Management Course. Having a work career that spans from banking (2 of the largest banks of the world), retail management, accounting, office management in logistics and warehouse, I found the course to be the most beneficial of my schooling. The formulas work when used with knowledge through experience and if not manipulated to exclude important values beyond the dollar. Resource values must be taken into effect and inclusion of the global market is a must.
Black-Scholes is flawed because it assumes market movements follow a normal distribution which is easily proven false.

The other formula not mentioned here is the copula formula used to assess the risk of derivatives. This is equally flawed because it assumed past correlations will be valid in the future.

Using either or both of these without a good understanding of the assumptions is a great way to loose a lot of money. 
Economics is a scam/ponzi scheme. All means of exchange induce slavery by one or more of the people in the group trading. Invariably someone will not have something someone else wants or needs creating either forced labor to acquire needs or poverty and hunger via their lack of access. We live in a time where all peoples needs could be met easily and with no "price-tag". Resource Based Economics is our only hope to stop this madness.
+Franklin Stone er, what? Economics without interference is merely the exchange of goods.

If a rancher and a farmer trade beef for wheat, who is the slave?
The entire economic paradigm we exist in is the opposite of a true economy. Economics is the means of economizing or reducing waste. This economy is only concerned w/ currency as if it gauges all values from all exchanges. There is damage to society and the environment through the use of monetary economics, by providing access to the material needs we all share, a higher standard of living would be available to all people. Meaning ignore the current broken system of economics as it provides more detriment than benefit to humanity.
The problem with resource based economics is that the people put in power to control the resources always become dictatorial. It is impossible for them to determine what the individual needs are and will therefore make choices for the individual which can never meet the actual requirements to live a decent life. Keeping in mind that resources extend beyond financial and into all aspects of resource requirements including education, housing, recreation, employment. Those chosen to control the resources will control all aspect of life, that is called slavery. We loose our right to choose for the false ideology of "good for the whole". You cannot force people out of poverty and a society cannot grow by controlling an individuals ability to accumulate wealth on their own terms free will must be paramount. +Stone's post mentions that "all means of exchange induce slavery by one or more of the people in the group trading" That is patently false, last time I checked there was no slavery here. If our government and others were using the capitalist system correctly, the individuals trading would receive resource necessary to their current state. Since we are never in the same state, resource are distributed with minimal scarcity. Our true responsibility in any government or economic system is to provide equal opportunity not equal share of resources. the Communists tried that and it always leads to mass poverty and misery, The Socialists are still trying it and creating huge debt, poverty, low growth, external reliance on innovation and basically a lazy population waiting for government to take care of their needs.
No, it's not. A pure system has a tendency toward that end, but that's not the definition of economics.

I do agree though that "modern" Keynsian economics is laughable as a sustainable model though.
+Joe Parker what you're describing is an economy that allows monopolies through governmental interference.
+Jeffrey Hamby With all due respect, I don't believe that I forwarded that idea since monopolies are illegal and don't work in a capitalist system. I am attempting to articulate the true nature of capitalism in that it allows the access to resources based on individual need through individual choice. Choice and free will cannot be preserved through centrally controlled resource distribution. History has proven time and again that anything else would prove oppressive and ineffective.
+Joe Parker It seems to me both you and Jeffrey agree but he was stating a contrarian argument. btw, your post is spot on.
Wow..really. If only the world was ruled by economists, what a wonderful place it'd be.
I do hope the socially inept never do come to hold the power of earths fate. Call that a sound byte if you must. 
+Jeffrey Hamby you are correct I should have finished my first cup of coffee before posting to your comment. Monopolies are inevitable with government interference.
According to stock market historian David Schwartz, market flows are cyclical. So i doubt if a single formula is to blame.
+Ryan Martin there is an interesting modern parable about the robber baron (greedy businessman) and the politician. Without giving you the entire story it accurately gives you a choice, either the greedy businessman or the politician. The author describes his choice and his reason for the choice, and I agree. The greed of the "robber baron" will eventually be satisfied. In modern terms there are a variety ways but the end is the same. the politicians greed can never be satisfied because his and those that follow him, believe thier greed is a matter of conscience. A conscience they falsely believe as superior with alternate ideas marked as heretical.
There's nothing wrong with buying options for security, a lot of people still doing it these days. But on smaller scale.!
+B Gallagher No, never been to Monaco nor Aspen. I don't consider the wealthy any more or less moral. They are producing something people obvoiusly consider to increase the value of their life. Who am I to judge? I won't tell the purchaser of their product not to buy and I won't tell the wealthy businessman not to sell. They both gain value from the transaction - no matter how small or large.
+Franklin Stone this sentence

"...There is damage to society and the environment through the use of monetary economics, by providing access to the material needs we all share, a higher standard of living would be available to all people..."

doesn't make sense.

Please re-read your posts before clicking send as you are doing your cause great damage by posting illogicalities.
You can't say a system takes the negatives of greed into account by making it the back bone of that system. A resource based economy makes greed irrelevant by removing the incentive. it also isn't run by people it's automated, meaning human needs are met using the best methods, not opinions.
easy greedy government that force market (bank) to have no responsability and sell house at people that didn't have the money to pay...
Jing Lu
There is nothing wrong with the formula itself, just it is not that versatile to take the human nature into consider, which are greedy, horrified, ,, these are the real reason caused the crash of the market.
"Spend too much, earn to little?" Yeah, that's an equation at the heart of the problem!
Jeffrey Hamby, The slaves are the people who can't be farmers or grape growers who have no demand for grapes. You say "That is the market, you capitulate to demand". But demand is the collective will of other people with more resources than you. You are a slave to their whims. The market induces this condition in its function.

Okay Resource Based Economics isn't utopian, it's not perfect but it does directly address the problems we face in a much more effective and "economic" way. If you use science and technology we already have, more effectively. Then everyone on earth could benefit from the access to abundance. That improves your life because that economic inequality we currently enjoy causes wars, violence, drug abuse, and a litany of other issues. No one would have an incentive to blow you up if they were free and you were free with no caveats. Without using any money, or government we can use the systems and technology that currently produce our goods and direct them into sating peoples needs first and their desires second. You provide access to the things people need and current need to consume constantly to keep the economy moving stops. This has side effects like sustainability and ecological health improvement. It also allows for wants to be truly explored, if you dont need a car, what do you want? If you don't need a job, what do you want to do. If you don't need tools eveyday but you always had access why keep them at your house at all or want to own anything?

You wouldn't pay for air or email, it's too abundant. Well so are TVs, clothes, food, cars, etc etc etc. The abundance around us is being wasted, creating enemies and starving the globes population. We can do better than this.
Single formula!Only the stupidity of certain people!
How eloquent is the modern youth. i.e. Junior Preece.
Yeah!Someone devide by zero!DAMMIT!
+B Gallagher Agreed. CDS and mortgage bundling had its misrepresentations and fraud. Both illegal.
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