Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?

LECTURING BIRDS ON FLYING

CAN MATHEMATHICAL THEORIES

DESTROY THE FINANCIAL MARKETS?

by

PABLO TRIANA

Foreword by Nassim Taleb

Bestselling Author of The Black Swan

“Make no mistake: Quantitative finance had a very large hand in what could well be the worst financial crisis in the history of mankind,” argues Pablo Triana, in his latest book LECTURING BIRDS ON FLYING: Can Mathematical Theories Destroy The Financial Markets? (Wiley; June 2009; $29.95; Hardcover). Finance theory failed on several fronts simultaneously during the present financial crisis, and blind devotion to it was instrumental in causing, encouraging, and not helping prevent the global-wide destruction of the markets.

If highly sophisticated financial models were useless in preventing catastrophes such as the Wall Street meltdown of October 1987, the Long Term Capital Management Crisis in 1998, and, most recently, the present financial collapse, then who needs them? Who needs mechanisms that pretend to map finance mathematically and yet don’t help when help is most needed?  Worse, who needs mechanisms with the capacity to wreak destruction themselves? The unavoidable truth is that flawed quantitative constructs played a decisive role in the unleashing of all of the worst market crises since the 29 Crash.

And, as tends to be the case, if these mathematical models and theories serve primarily as window-dressing for self-serving bankers and punters, then all the glorified technical brilliance would appear to be nothing more than a shameless sales pitch in search of a quick buck.

Written in plain English and accessible to readers with little or no knowledge of the markets, Pablo Tirana’s LECTURING BIRDS ON FLYING: Can Mathematical Theories Destroy The Financial Markets? discusses many important and newsworthy topics, including:

• Why markets can’t be tamed with equations—and why the human factor will always defy any attempt to do so.

• How Business Schools transformed themselves from being institutions concerned with real-world realities into entities obsessed with abstruse financial theorizing that has the potential to unleash mayhem on the markets and all of us.

• How the models employed by rating agencies to evaluate the creditworthiness of complex credit derivatives on the run-up to the 2008 collapse of the financial markets failed dramatically.
  
  
• What’s wrong with Value at Risk as a risk management tool? And why did virtually everyone in the finance industry use it when it failed to measure risks even half-accurately and, worse, decisively encouraged and sanctioned the wildly leveraged irresponsible toxic punting that brought Wall Street (and consequently the rest of the world) on to its knees? VaR caused the credit crisis, and the regulators who embraced it and promoted it for years should be blamed.
  
  
• Why and how the famous Black-Scholes formula proved to be not only of limited use but dangerously misleading and chaos-fueling as a tool for valuing financial instruments.
  
  
• Why we need to make a radical substitution of mathematical decision-making with good old-fashioned commonsense decision-making. Our unhealthy yearning for precision has cost us dearly. Enough is enough.
  
  
• The Nobel Prize in Economics and the real rationale behind the prize—and why we are suckers for diploma-waving, certainty-promising, quantitative snake-oil peddlers.

“This is the very first book that looks at the side effects of models, at the harm caused by models, and fearlessly points fingers where fingers should be pointed. I am convinced that the reader will come out of reading it much wiser, and that the publication of this book will make society a better, safer, and more risk-conscious place,” says Nicholas Nassim Taleb, best-selling author and former hedge fund manager.

LECTURING BIRDS ON FLYING: Can Mathematical Theories Destroy The Financial Markets? will do more than just explain to readers how Wall Street, financial economists, regulators and other promoters of quantitative mumbo-jumbo got us into our present financial predicament. Pablo Triana’s book will show them how to be on guard for the next, which, if the world´s obsessive acceptance and reverence of finance theory continues, is just waiting around the corner.

About the Author

Pablo Triana 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.com, and Risk magazine, among others. He is also the author of Corporate Derivatives. He holds a Master of Science form New York University’s Stern School of Business and a Master of the Arts from American University.

Lecturing Birds on Flying:

Can Mathematical Theories Destroy The Financial Markets

By Pablo Triana

Wiley; June 2009; $29.95; Hardcover

ISBN:  9780470406755