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+ - The Maths-formula that lead to the financial crash-> 1

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jools33
jools33 writes "This is a fascinating story from the bbc of how a mathematical formula revolutionised the world of finance — which ultimately could have been responsible for its downfall. The Black-Scholes mathematical model, introduced in the 70s, opened up the world of options / futures / derivatives trading in a way that nothing before or since has accomplished, its phenominal success and widespread adoption lead to the discoverer winning a nobel prize in economics and yet it could ultimately have been responsible for the financial crisis of the past few years. Its interesting to ponder how algorithms and formulas that we work on today could fundamentally influence humanity's future."
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The Maths-formula that lead to the financial crash

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  • The year after Myron Scholes won the Nobel prize, his hedge fund crashed

    But still people continued to apply his methods.

    "The equation is based on the idea that big movements are actually very, very rare. The problem is that real markets have these big changes much more often that this model predicts," says Stewart. "And the other problem is that everyone's following the same mathematical principles, so they're all going to get the same answer."

    Really? So some bright spark comes up with a method of predicting financial movements based on THE ASSUMPTION that big swells almost never happen and ignored the fact that if the entire global economy uses his model it pretty much guarantees big swells?

Facts are stubborn, but statistics are more pliable.

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