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

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 VaR 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