Myron Scholes

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pages: 542 words: 145,022

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

Forbes, November 27, http://www.forbes.com/sites/schifrin/2013/11/27/putting-intel-inside-your-401k/#10f9e5381c16. Scholes, Myron S. 1970. “A Test of the Competitive Market Hypothesis: The Market for New Issues and Secondary Offerings.” PhD diss., University of Chicago. ________. 1997. “Myron Scholes—Biographical.” The Nobel Foundation, https://www.nobelprize.org/prizes/economic-sciences/1997/scholes/biographical/. ________. 1998. “Derivatives in a Dynamic Environment.” American Economic Review 88, no. 3: 350–70. Scholes, Myron, and Joseph Williams. 1977. “Estimating Betas from Nonsynchronous Data.” Journal of Financial Economics 5, no. 3: 309–27. Scholes, Myron, Mark Wolfson, Merle Erickson, Michelle Hanlon, Edward Maydew, and Terry Shevlin. 2014.

.… Owning index funds, with their cost-efficiency, their tax-efficiency, and their assurance that you will earn your fair share of the markets’ returns, is, by definition, a winning strategy.… Stay the course!”120 6 Myron Scholes and the Black-Scholes / Merton Option Pricing Model FAMOUS MATHEMATICIANS and physicists often have arcane formulas permanently associated with their names as their legacy. Pythagoras has a2 + b2 = c2, Isaac Newton has F = ma, and Albert Einstein has E = mc2. However, it’s an exceptionally rare honor for economists, who are known more for being dismal than for their mathematical precision. Myron Scholes is that rare exception. Myron Scholes is the co-originator of the Black-Scholes option-pricing formula, a mathematical expression that produces the price of complex securities such as stock options, warrants, and other so-called derivative securities (securities whose payoffs depend on or derive from those of other securities).

However, the academic financial research by Markowitz as well as his fellow Nobel laureates such as James Tobin, Paul Samuelson, Bill Sharpe, Myron Scholes, Bob Merton, Gene Fama, and Bob Shiller and by other exceptional researchers has created a framework and repeatable process for investors that has led to the democratization of investment management. This book is about their contributions to portfolio management. Is there a Perfect Portfolio of assets for investors, one that offers the ideal mix of risk and reward? Over the past decade of our journey, we asked this question to ten prominent iconic figures and thought leaders in the industry—Harry Markowitz, Bill Sharpe, Gene Fama, Jack Bogle, Myron Scholes, Bob Merton, Marty Leibowitz, Bob Shiller, Charley Ellis, and Jeremy Siegel—and their answers were both expected and unexpected.


pages: 364 words: 101,286

The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot, Richard L. Hudson

Alan Greenspan, Albert Einstein, asset allocation, Augustin-Louis Cauchy, behavioural economics, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, British Empire, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, electricity market, Elliott wave, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial engineering, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John Meriwether, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, Myron Scholes, new economy, paper trading, passive investing, Paul Lévy, Paul Samuelson, plutocrats, power law, price mechanism, quantitative trading / quantitative finance, Ralph Nelson Elliott, RAND corporation, random walk, risk free rate, risk tolerance, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, Vilfredo Pareto, volatility smile

The fundamental approximation theorem of portfolio analysis in terms of means, variances and higher moments. Review of Economic Studies 37 (112) October: 537-542. Scholes, Myron S. 1995, Fisher Black. Journal of Finance 50 (5): 1359–1370. Scholes, Myron S. 1997. Autobiography. Nobel e-Museum, www.nobel.se/economics/laureates/1997/. Scholes, Myron S. 2000. Crisis and risk management. American Economic Review 90 (2): 17-21. Scholes, Myron S. 2001. Merton H. Miller: Memories of a great mentor and leader. Journal of Finance 56 (4): 1179-1182. Schoutens, Wim. 2003. Lévy Processes in Finance: Pricing Financial Derivatives.

To understand why the orthodox theory of financial markets and investment is so flawed, it first helps to review it—and there is no better way than by portraying a few men of the twentieth century who stand out as especially influential, regardless of whether one agrees with them or not. They are Louis Bachelier, Harry Markowitz, William Sharpe, and the duo of Fischer Black and Myron Scholes. The first, hero of this chapter, was a maverick, a lone visionary who overcame the general apathy and occasional opprobrium of his contemporaries and doggedly pursued his unique view of the financial world. The others, appearing in the next chapter, were secure in their professions and honored by their peers; their importance was to have made the boldest strokes that completed the canvas begun by Bachelier.

In the foreign exchange market, where $15 trillion of options were traded in 2001, one study found some dollar-yen options underpriced by 84 percent, and some Swiss franc–dollar options undervalued by 40 percent. Valuing options correctly is a high-roller game, but the rules are all messed up. As described earlier, the most widely known formula was published in 1973 by Fischer Black and Myron Scholes, and it has been known for years that it is simply wrong. It makes unrealistic assumptions. It asserts that prices vary by the bell curve; volatility does not change through the life of the option; prices do not jump; taxes and commissions do not exist; and so on. Of course, these are simplifications to make the math easier.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, Michael Milken, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, Performance of Mutual Funds in the Period, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk free rate, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, stochastic process, Thales and the olive presses, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

He originally started out in science and mathematics and never had a course in economics or finance. In 1965 while working at Arthur D. Little in Boston, he met Jack Treynor and was captivated by his theories. Although not yet an academic, Black collaborated with Myron Scholes and Robert Merton in the early 1970s to develop the most widely used formula for pricing options. Fischer Black had been stuck on the options problem for “many, many months” when he started working with Myron Scholes. Scholes collaborated with Black to unlock the puzzles of option pricing. Their article on the subject was rejected at first as excessively specialized, but thanks to Merton Miller’s intervention it finally appeared just as the Chicago Board Options Exchange opened for business in 1973.

The Writings of Leonard Jimmie Savage–A Memorial Selection, W. Allen Wallis, ed. American Statistical Association and The Institute of Mathematical Statistics. Scheinman, William X. 1991. “All Win.” Timings, January 28. Scholes, Myron S. 1972. “The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices.” Journal of Business, Vol. 44, No. 2 (April). Also in Lone and Brealey (1972). Scholes, Myron S. 1990. “In Honor of Merton H. Miller’s Contributions to Finance and Economics.” Journal of Business, Vol. 63, No. 1, Part 2 (January), pp. 81–85. Schweiger, Irving. 1967. “The Journal of Business.”

I have been unusually fortunate in having had such generous and essential assistance from the people named below. The book could never have taken shape without the participation of the people whose work it describes: Fischer Black, Eugene Fama, William Fouse, Hayne Leland, Harry Markowitz, John McQuown, Robert C. Merton, Merton Miller, Franco Modigliani, Barr Rosenberg, Mark Rubinstein, Paul Samuelson, Myron Scholes, William Sharpe, James Tobin, Jack Treynor, and James Vertin. Each of them spent long periods of time with me in interviews, and most of them engaged in voluminous correspondence and telephone conversations as well. All of them read drafts of the chapters in which their work is discussed and gave me important criticisms and suggestions that enrich virtually every page of the book.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, Alan Greenspan, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, Bob Litterman, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, Glass-Steagall Act, global macro, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low skilled workers, managed futures, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, National best bid and offer, negative equity, Northern Rock, Occupy movement, oil shock, price stability, proprietary trading, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

By 2007, JWMP managed roughly $3 billion in assets, most of it from fund-of-funds investors. Platinum Grove Asset Management Former LTCM principals Myron Scholes and Chi-Fu Huang, along with three former LTCM employees, Ayman Hindy, Lawrence Ng, and Tong-Sheng Sun, left to start their own hedge fund. Platinum Grove Asset Management LLC (PGAM) was located in a beautiful office in Rye Brook, New York. Its dealing room was quiet and organized, unlike the typical trading-floor chaos. PGAM was primarily a fixed-income hedge fund. It used the same variety of fixed-income strategies that LTCM had favored. Myron Scholes believed this new operation was more sound than LTCM had been, mainly because Scholes was running it.9 PGAM also made some of the same risk-management changes that JWMP used.

The third part of the book speaks about some of the same elements of crowd behavior snuck into the May 2010 Flash Crash–when Apple stock traded briefly for $100,000 per share–and on to the continuing debt saga in Europe which started with the Greek crisis. Throughout the book, I sprinkle in excerpts from my interviews with many of the people who were on the front line of the crises, including five LTCM partners: Eric Rosenfeld, Chi-Fu Huang, Hans Hufschmid, and Nobel prize winners Robert Merton and Myron Scholes. I also spoke with numerous bank authorities, like Sir Deryck Maughan, former Vice Chairman of Citibank, Andrew Crockett, former Head of the BIS, the founders and CEOs of many leading hedge funds, including Goldman Sachs Alpha fund. These are supplemented by numerous other sources–testimonies, court documents, newspaper articles and previous books on the crises–that helped me understand and explain what had happened.

Resigned in 2007 due to the poor performance of mortgage-related products. Franklin Raines: CEO of Fannie Mae from 1999 to 2004 and Vice Chairman of Fannie Mae from 1991 to 1996. Julian Robertson: Founder of the very successful hedge fund Tiger Management. Eric Rosenfeld: Principal at LTCM and JWMP. Meriwether's right-hand man. Myron Scholes: Principal at LTCM and PGAM. Winner of the 1997 Nobel prize in economics. Alan Schwartz: CEO and President of Bear Stearns during 2008. William Sharpe: Professor at Stanford University and co-inventor of the CAPM. Won the 1990 Nobel in economics for his work on asset pricing theory. Robert Shustak: CFO of LTCM.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

Finally, fixed-income arbitrageurs pursue a variety of other trades such as municipal bond spreads, emerging market bonds, the bond futures basis relative to the cash market (based on cheapest-to-deliver considerations), structured credit, and break-even inflation trading.8 14.10. INTERVIEW WITH NOBEL LAUREATE MYRON SCHOLES Myron Scholes was awarded the Nobel Prize in 1997 for his new method of determining the value of derivatives, notably the famous “Black–Scholes–Merton formula.” He has held several professorships, currently the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business, and has served as the chairman of Platinum Grove Asset Management, a principal and limited partner at Long-Term Capital Management, and a managing director at Salomon Brothers.

Ainslie III of Maverick Capital 108 Chapter 8 Dedicated Short Bias 115 Interview with James Chanos of Kynikos Associates 127 Chapter 9 Quantitative Equity Investing 133 Interview with Cliff Asness of AQR Capital Management 158 Part III Asset Allocation and Macro Strategies 165 Chapter 10 Introduction to Asset Allocation: The Returns to the Major Asset Classes 167 Chapter 11 Global Macro Investing 184 Interview with George Soros of Soros Fund Management 204 Chapter 12 Managed Futures: Trend-Following Investing 208 Interview with David Harding of Winton Capital Management 225 Part IV Arbitrage Strategies 231 Chapter 13 Introduction to Arbitrage Pricing and Trading 233 Chapter 14 Fixed-Income Arbitrage 241 Interview with Nobel Laureate Myron Scholes 262 Chapter 15 Convertible Bond Arbitrage 269 Interview with Ken Griffin of Citadel 286 Chapter 16 Event-Driven Investments 291 Interview with John A. Paulson of Paulson & Co. 313 References 323 Index 331 The Main Themes in Three Simple Tables OVERVIEW TABLE I. EFFICIENTLY INEFFICIENT MARKETS Market Efficiency Investment Implications Efficient Market Hypothesis: Passive investing: The idea that all prices reflect all relevant information at all times.

Global Macro Investing: George Soros: Betting on the macro developments in global bond, currency, credit, and equity markets. The macro philosopher who “broke the Bank of England.” Managed Futures Strategies: David Harding: Trend-following trades across global futures and forwards. Devised a systematic trend-detection system. Fixed-Income Arbitrage: Myron Scholes: Relative value trades across similar securities such as bonds, bond futures, and swaps. Traded on his seminal academic ideas that won the Nobel Prize. Convertible Bond Arbitrage: Ken Griffin: Buying cheap illiquid convertible bonds and hedging with stocks. Boy king who started trading from his Harvard dorm room and built a big business.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, behavioural economics, Black Monday: stock market crash in 1987, Bob Litterman, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, seminal paper, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

This answer was a great relief to me, as it should be to all who appreciate the value of Capital Ideas to the world of investing. Markowitz’s work on portfolio selection was the foundation of all that followed in the theory of finance, and of the Capital Asset Pricing Model in particular. bern_c09.qxd 3/23/07 9:06 AM Page 110 9 Myron Scholes “Omega Has a Nice Ring to It” hen Myron Scholes graduated from McMaster University in Hamilton, Ontario, in 1962, his family wanted him to join their book publishing business. Scholes was not interested in going into business at that time. Instead, he went to the Graduate School of Business at the University of Chicago, where he launched what would turn out to be a spectacular career as an academic, including a Nobel Prize in Economic Science for his contribution to the Black-Scholes-Merton option pricing model.

Andrew Lo: “The Only Part of Economics That Really Works” 6. Robert Shiller: The People’s Risk Manager 47 58 65 The Engineers 7. Bill Sharpe: “It’s Dangerous to Think of Risk as a Number” vii 91 bern_a02ftoc.qxd 3/23/07 8:42 AM Page viii viii CONTENTS 8. Harry Markowitz: “You Have a Little World” 9. Myron Scholes: “Omega Has a Nice Ring to It” 100 110 PART III: THE PRACTITIONERS 10. Barclays Global Investors: “It Was an Evangelical Undertaking” 11. The Yale Endowment Fund: Uninstitutional Behavior 12. CAPM II: The Great Alpha Dream Machine: We Don’t See Expected Returns 13. Making Alpha Portable: “That’s Become the New Mantra” 14.

Samuelson, “Lord Keynes and the General Theory,” Economica 14 (1946), pp. 187–199 We make models to abstract reality. But there is a meta-model beyond the model that assures us that the model will eventually fail. Models fail because they fail to incorporate the inter-relationships that exist in the real world. Myron Scholes, speech at NYU/IXIS conference on hedge funds, New York, September 2005 he revolution in the theory and practice of investing that swept over Wall Street during the last three decades of the twentieth century had been carried out by scholars toiling in the ivory towers, far away from the heart of the financial world in New York City.


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Alan Greenspan, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

The Efficient Markets Hypothesis didn’t appear in a vacuum, however. It was part of a new quantitative movement in financial economics, along with Harry Markowitz’s optimal portfolio theory; William Sharpe’s Capital Asset Pricing Model (which we’ll come back to in chapter 8); and Fischer Black, Myron Scholes, and Robert C. Merton’s option pricing formula. These discoveries appeared within a few years of each other, and they illuminated aspects of market behavior that had remained mysterious for centuries. Of all the discoveries in the new quantitative finance movement, however, the Efficient Markets Hypothesis was the crown jewel.

In 2002, Montague and Berns reviewed the neurophysiological data and located a dopamine-receiving structure in the brain that seemed to translate reward response into neural activity in a manner eerily reminiscent of the famous Black-Scholes/Merton option pricing formula.31 This startled scientists, since options are an important part of the derivatives market, the financial market in which complicated contracts related to the outcomes of future events are traded. Economists think so highly of the Black-Scholes/Merton model that Myron Scholes and Robert C. Merton were awarded the Nobel Prize in Economics for its discovery in 1997 (Fischer Black died two years before). The explosion of the options market is often credited to the rise of the option-pricing pocket calculator in the 1970s. Did Homo sapiens already have the neurological equivalent of an option-pricing calculator in its head?

Meriwether would raise a record-breaking (for that time) $1 billion to start his fund, but an essential part of his strategy was to use extremely high ratios of leverage—upwards of twenty or even thirty—to magnify that initial stake even further.27 LTCM opened to great fanfare in 1994. Meriwether not only had managed to recruit the nucleus of his old group at Salomon Brothers, but also intellectual luminaries of academic finance like future Nobel laureates Robert C. Merton and Myron Scholes. The new fund was almost immediately successful, despite a newfound nervousness in the global bond market. This early success didn’t depend as much on the firm’s mathematical trading models, the general principles of which were well known by that time, but in two areas of superiority: expertise in reading those models, and the ability to acquire lower-cost financing to take advantage of the opportunities detected by those models.28 These key adaptations kept LTCM extremely profitable well into 1997, the year of the Asian financial crisis.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

“Somebody’s going to do your dissertation in an afternoon if you don’t hurry up.”20 By the time Fama finished his dissertation, in 1964, and was asked to stay on as an assistant professor, a whole crowd of quantitatively minded, computer-savvy students was beginning to make waves. The ones who were to attain the most prominence were Michael Jensen, Myron Scholes, and Richard Roll. Jensen and Scholes both enrolled in the Chicago MBA program in autumn 1962. Jensen was the son of a printer at the Minneapolis Star-Tribune, and had put himself through Macalester College by working a daily shift in a print shop. After trying and failing to get in to Harvard Business School, he got a Chicago scholarship and headed south with no real idea what was in store for him (other than a night-shift printing job at the Chicago Tribune).

His dream shattered against the strictures of the Depression-era Glass-Steagall Act, which banned banks from getting into the brokerage business.31 But McQuown’s team had spent several years investigating the merits of an index-based mutual fund, and along the way became the nation’s chief employer of moonlighting finance professors—most of whom McQuown had met at CRSP seminars. Myron Scholes and Michael Jensen were the first hires, followed by such present and future notables as Sharpe, Burton Malkiel, Barr Rosenberg of UC–Berkeley, and Fischer Black, a computer scientist who had succeeded Treynor at Arthur D. Little. In 1971 the courts definitively closed the door to a Wells Fargo retail mutual fund.

Not surprisingly, he looked for guidance to CAPM, in which risk is a stock’s sensitivity to the fluctuations of the market and expected return is a function of that. Considered in this way, it didn’t matter what the stock’s expected return was. The return was already reflected in its price. All that mattered was volatility. Black teamed up with Myron Scholes, who had just arrived from Chicago to teach finance at MIT’s Sloan School, and the pair worked out the proof for an equation that valued an option using the price of the underlying stock, the exercise price of the option, the time until the option expired, the risk-free interest rate, and the variance of the stock.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, low interest rates, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, off-the-grid, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, Tyler Cowen, value at risk

It’s said that the first time he went off on his solo, the other musicians simply put down their instruments and stared.) The moment in finance came in 1973, with the publication of a paper in the Journal of Political Economy titled “The Pricing of Options and Corporate Liabilities,” by Fischer Black and Myron Scholes. Derivatives have a bad press at the moment, but it’s important to acknowledge their role in the long history of man’s attempt to understand, control, and make money from risk. The study of risk is a humanist project, an attempt to abolish the idea of incomprehensible fate and replace it with the rational, quantifiable study of chance.1 Once upon a time, we were the playthings of fate, and the future was unknowable; but then, starting with philosophers and mathematicians such as Pierre de Fermat, Blaise Pascal, and Christiaan Huygens, humanity began to work out ways in which the future could be measured and assessed in terms of probabilities.

As soon as the market in derivatives was professionalized at the Chicago exchange, it quickly became obvious that there was a huge potential market in the field of financial derivatives, which derived their value not from eggs or butter or wheat but from shares. The market, however, was hampered by one big thing: no one could work out how to price the derivatives. The interacting factors of time, risk, interest rates, and price volatility were so complex that they defeated mathematicians until Fischer Black and Myron Scholes published their paper in 1973, one month after the Chicago Board Options Exchange had opened for business. The revolutionary aspect of Black and Scholes’s paper was an equation enabling people to calculate the price of financial derivatives based on the value of the underlying assets. The Black-Scholes formula opened up a whole new area of derivatives trading.

(It’s what Nick Leeson was supposed to be doing, exploiting tiny differences in the price of Nikkei 225 futures between the Osaka exchange, where trading was electronic, and the Singapore exchange, where it wasn’t. The gap in price would last only for a couple of seconds, and in that gap Barings would buy low and sell high—a guaranteed, risk-free profit.) The complexity of the mathematics involved in derivatives can’t be exaggerated. This was the reason John Meriwether, a famous bond trader, employed Myron Scholes—he of the Black-Scholes equation—and Robert Merton, the man with whom he shared the 1997 Nobel Prize in Economics, to be directors and cofounders of his new hedge fund, Long-Term Capital Management.* The idea was to use these big brains to create a highly leveraged, arbitraged, no-risk investment portfolio designed to profit no matter what happened, whether the market went up, down, or sideways or popped out for a cheese sandwich.


pages: 432 words: 106,612

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth

Albert Einstein, algorithmic trading, asset allocation, Bear Stearns, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Blitzscaling, Brownian motion, buy and hold, California gold rush, capital asset pricing model, Carl Icahn, cloud computing, commoditize, coronavirus, corporate governance, corporate raider, COVID-19, data science, diversification, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, fear index, financial engineering, fixed income, Glass-Steagall Act, Henri Poincaré, index fund, industrial robot, invention of the wheel, Japanese asset price bubble, Jeff Bezos, Johannes Kepler, John Bogle, John von Neumann, Kenneth Arrow, lockdown, Louis Bachelier, machine readable, money market fund, Myron Scholes, New Journalism, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Performance of Mutual Funds in the Period, Peter Thiel, pre–internet, RAND corporation, random walk, risk-adjusted returns, road to serfdom, Robert Shiller, rolodex, seminal paper, Sharpe ratio, short selling, Silicon Valley, sovereign wealth fund, subprime mortgage crisis, the scientific method, transaction costs, uptick rule, Upton Sinclair, Vanguard fund

To aid their crusade—and financed by the executive office’s largesse—McQuown had assembled an all-star cast of academics to consult for Wells Fargo, which at various points included William Sharpe, Jim Lorie, Lawrence Fisher, Michael Jensen, Harry Markowitz, Merton Miller, and Jack Treynor, as well as Fischer Black and Myron Scholes—two emerging superstar economists. Mac had met many of them at the twice-yearly CRSP seminars in Chicago, which he would religiously attend, and Dick Cooley willingly opened Wells Fargo’s purse strings to fund any research they wanted to do. Gene Fama never worked formally for Wells Fargo, but did contribute research, and served as an intellectual godfather for the group.

McQuown naturally signed up, but the coup was enticing Booth and Sinquefield’s mentor Fama to sign on as director of research at the nascent company, in return for a small equity stake in the company. The mutual fund needed a separate board, which they rounded up largely by roaming the hallways of Chicago’s business school. It ended up being a glittering array of economic superstars, such as Merton Miller, Myron Scholes, Richard Roll (one of Fama’s protégés), Roger Ibbotson, and Jack Gould. Booth and Sinquefield told them they couldn’t pay any compensation to begin with, but promised director fees if their new company ever made it.12 Intrigued at the prospect of a research-led investment company, founded by two of Chicago’s brightest students, that promised to translate their theories into practice, they all agreed.

A formidable woman, she then parlayed her expertise in statistics and programming—honed through long stints in the computer center at the business school—into a job at the Chicago Board of Trade, one of the oldest trading pits in the world. CBOT has since the 1930s been based in a majestic skyscraper in the heart of Chicago’s financial district, and gradually emerged as a powerhouse of the financial derivatives industry that had exploded after Myron Scholes and Fischer Black published their groundbreaking model to price options—one of the most popular forms of derivatives—in 1973. At CBOT, Jeanne Sinquefield worked on designing derivatives, which is a high-octane, complex field. Klotz and Booth quickly realized that DFA needed someone to beef up their trading systems, especially vital since smaller stocks were vastly more arduous to trade than the likes of Coca-Cola or General Motors.


pages: 198 words: 53,264

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, AOL-Time Warner, asset allocation, Bear Stearns, behavioural economics, bitcoin, Bretton Woods, buy and hold, buy low sell high, Carl Icahn, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial engineering, financial innovation, fixed income, global macro, hindsight bias, index fund, initial coin offering, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, low interest rates, Market Wizards by Jack D. Schwager, mega-rich, merger arbitrage, multilevel marketing, Myron Scholes, Paul Samuelson, Pershing Square Capital Management, quantitative easing, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, Robert Shiller, short squeeze, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, subprime mortgage crisis, transcontinental railway, two and twenty, value at risk, Vanguard fund, Y Combinator

Prior to joining Salomon Brothers, Merton taught at the MIT Sloan School of Management until 1988, before moving to Harvard University. His pedigree was flawless, and the influence Merton had on the world of finance cannot be overstated. Stan Jonas, a derivatives wizard once said, “Most everything else in finance has been a footnote on what Merton did in the 1970s.”5 Meriwether was also able to recruit Myron Scholes, cocreator of the Black‐Scholes option pricing model. Scholes received his MBA and PhD at the University of Chicago Booth School of Business. He then went on to work at the MIT Sloan School of Management before coming back to teach at Chicago. It should be clear by now that the résumés at Long‐Term Capital Management were truly second to none.

In the first 10 months that they were open, they earned 20%.10 In 1995, the fund returned 43%, and in 1996, they earned 41% in a year in which their profits totaled $2.1 billion: To put this number into perspective, this small band of traders, analysts, and researchers, unknown to the general public and employed in the most arcane and esoteric of businesses, earned more that year than McDonald's did selling hamburgers all over the world, more than Merrill Lynch, Disney, Xerox, American Express, Sears, Nike, Lucent, or Gillette—among the best‐run companies and best known brands in American business.11 Long‐Term Capital Management was on a roll indeed. Their returns were high and steady, with their worst losing month being just a 2.9% decline.12 It seemed too good to be true. In the fall of 1997, Robert Merton and Myron Scholes both were awarded with the Nobel Prize in Economics. Of their achievement, The Economist wrote that they had turned “risk management from a guessing game into a science.” Their returns continued uninterrupted and they managed to quadruple their capital without having a single losing quarter.13 But the good times would not last forever, because on Wall Street, such winning strategies tend to have a short half‐life.

., founding, 132 Paulson, John, 3, 129, 131–132 merger/arbitrage, 133 Pearson, Mike, 113 Buffett, contrast, 114 Pellegrini, Paolo, 132–133 Penn Dixie Cement, shares (purchase), 58 Pershing Square Capital Management, 89 Pittsburgh National Bank, 101 Plasmon (Twain investment), 28 Polaroid, trading level, 70 Poppe, David, 114 Portfolio turnover, 69 Portugal, Ireland, Italy, Greece, Spain (PIIGS), 158 Post‐go‐go years meltdown, 147 Post III, William, 131 Price, Teddy, 19–20 Princeton University, 47–48 Private/public investing, history, 149 Profit sharing, 68 Prospect Theory (Kahneman/Tversky), 126 Pyramid schemes, 93 Qualcomm, gains, 57 Quantitative easing program, 134–135 Quantum Fund, 100, 103 Ramirez, Alberto/Rosa, 132 Rational thinking, suspension, 27 Recession, odds (calculation), 38 Renaissance Technologies, 135 Return on equity, term (usage), 4 Reverse crash, 100 Risk, arrival, 32 Risk management, 23 Roaring Twenties, bull market cycle, 7 Robertson, Julian, 58 Roche, Cullen, 99 Rockefeller, John, 30 Rogers, Henry (“Hell Hound”), 30–32 Rooney, Frank, 80, 81 Rosenfeld, Eric, 39, 41 Ruane, Bill, 4, 109, 112 Ruane & Cunniff, 112 Ruane, Cunniff & Goldfarb, 110–111 Russell 3000, 135 Russia, Quantum Fund loss, 103–104 Sacca, Chris, 145, 149–150 Salomon Brothers, 39 Buffett investment, 79 Samuelson, Paul (remarks), 51 San Francisco Call, 31 Schloss, Walter, 4 Schmidt, Eric, 150 Scholes, Myron, 39 Nobel Prize in Economics, 40–41 Schroeder, Alice, 80 Schwager, Jack, 159 Sears, Ackman targeting, 90 Sears Holdings, 109 Securities and Exchange Act, 7 Securities and Exchange Commission (SEC) 13D registration, 90 creation, 22 Security Analysis (Graham), 3–5 See's Candy Berkshire Hathaway purchase, 78 purchase, 142 Self‐esteem, satisfaction (impact), 75–76 Sequoia Fund, 107 operation, 110–111 Shiller, Robert, 75–76, 87 Short squeeze, 93 Silvan, Jon, 94 Simmons, Bill, 151 Simons, Jim, 135 Slack, Sacca investment, 149 Smith, Adam, 68, 121 Snapchat, 151 Snap, going public, 151 Snowball, The, (Schroeder), 80 Social activities, engagement, 87–88 Soros Fund Management, losses, 105 Soros, George, 58, 60, 100, 103 interaction, 102 reform, 121 South Sea Company shares, 37 Speculation, 15 avoidance, 28 SPY, 62 Stagecoach Corporate Stock Fund, 52 Stamp revenues, trading, 141–142 Standard Oil, 30 Standard & Poor's 500 (S&P500) ETF, 62 gains, 112, 114 performance, comparison, 119 shorting, 163 Valeant performance, comparison, 113 Steinhardt, Fine, Berkowitz & Company, opening, 58 Steinhardt, Michael, 55, 58 performance record, 59–60 Steinhardt Overseas Fund, 60 Stoker, Bram, 30 Stock market, choices, 114–115 Stocks crashing/reverse crashing, 100 return, 99 stock‐picking ability, 88 Stock trader, training, 18 Strategic Aggressive Investing Fund, 102 Sunk cost, 110 Sun Valley Conference, 57 “Superinvestors of Graham‐and‐Doddsville, The,” 111–112 Taleb, Nassim, 42 Target, Ackman targeting, 90 TDP&L, 50 Tech bubble, inflation, 57 Technivest, 50 Thaler, Richard H., 75, 126 Thinking, Fast and Slow, (Kahneman), 15 Thorndike, Dorain, Paine & Lewis, Inc., 48 Time horizons, 120 Time Warner, AOL merger, 49 Tim Ferriss Show, The, (podcast), 150 Tim Hortons, spinoff, 89 Tract on Monetary Reform, A, (Keynes), 125–126 Trader (Jones), 119 Trustees Equity Fund, decline, 50 Tsai, Jerry, 65, 68 stocks, trading, 69 ten good games, 71 Tsai Management Research, sale, 70 Tversky, Amos, 81 Twain, Mark (Samuel Clemens), 25, 27, 75 bankruptcy filings, 32 money, losses, 27–32 public opinion, hypersensitivity, 31 Twilio, Sacca investment, 149 Twitter, Sacca investment, 149–150 Uber, Sacca investment, 149 Undervalued issues, selection, 10 Union Pacific, shares (sale), 18 United Copper, cornering, 19 United States housing bubble, 132 University Computing, trading level, 70 US bonds international bonds, spreads, 41 value, decline, 61 U.S. housing bubble, impact, 132 U.S.


How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

Early twentiethcentury financial market participants in Chicago and New York actively JWPR007-Lindsey May 7, 2007 18:27 Introduction 5 traded commodity and equity options during regular time periods, albeit off the exchange floors, and prices were reported in the papers. Like Fermat, what Fischer Black and Myron Scholes (and Robert Merton) added, was a way to determine the “fair” value of an option (subject to various caveats related to the reasonableness of the model’s assumptions). Once adopted, their solution replaced the prior ad hoc pricing approach. Fermat is not the only historical example of a scientist devising a financial innovation that today would label him as a quant.

But in the 1970s, access to a machine like the PDP-1, with graphics, sound, plotting, and a supportive hacker1 culture was a rare opportunity. It was also the first of the series of accidents that eventually led me into quantitative finance. I wish could I could say that I realized the PDP-1 would allow me to use the insights of Fisher Black, Myron Scholes, and Robert Merton to become a god of the options market and buy Chicago, but those were the guys at O’Connor and Chicago Research and Trading, not me. I used the machine to simulate nuclear physics experiments for the lab that adopted me as a sophomore. They flew down to use the particle accelerators at Brookhaven National Lab to find out the meaning of life, the universe, and everything else by smashing one atomic nucleus into another.

In junior high school, I was a star of the Mathletes team. I went to Harvard, where I studied math and physics. I even had a job at the Princeton Plasma Physics Laboratory working on the Tokomak Fusion reactors. I then went to the University of Chicago for business school, where I took courses given by Myron Scholes and Merton Miller, among others. 177 JWPR007-Lindsey 178 April 30, 2007 18:1 h ow i b e cam e a quant My first indication that I wasn’t a quant came in college. While I was taking advanced math courses, one teacher wrote on my first math exam: “You have a serious misunderstanding, please see me.”


Phil Thornton by The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)

Alan Greenspan, availability heuristic, behavioural economics, Berlin Wall, bitcoin, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, Cass Sunstein, choice architecture, cognitive bias, collapse of Lehman Brothers, Corn Laws, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, double helix, endogenous growth, endowment effect, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, fixed income, Ford Model T, full employment, hindsight bias, income inequality, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, liquidity trap, loss aversion, mass immigration, means of production, mental accounting, Myron Scholes, paradox of thrift, Pareto efficiency, Paul Samuelson, Post-Keynesian economics, price mechanism, pushing on a string, quantitative easing, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, school vouchers, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Toyota Production System, trade route, transaction costs, unorthodox policies, Vilfredo Pareto, women in the workforce

It also laid the foundation of the efficient-market hypothesis, the theory set out by Eugene Fama, who shared the Nobel Prize in 2013 for that work. Similarly his work on the pricing of warrants – options to buy, at a future date, stock issued by a company – laid the ground for research on how to price financial options. This earned Nobel Prizes for Robert Merton, Fischer Black and Myron Scholes, but also led indirectly to the massive growth in complex financial products. 188 The Great Economists Long-term legacy There is no doubt that Paul Samuelson has left a permanent imprint on the understanding and teaching of economics. In a career that spanned seven decades he wrote innumerable papers on a huge number of issues across the broad spectrum of economics.

Roosevelt) 148 New Keynesianism 159, 163 New Neoclassical Synthesis 111 Nicholas I, Tsar 52 NINJA (No Income, No Job, No Assets) homebuyers 61–2 Nixon, Richard 109, 146 Nobel laureates Kenneth Arrow (1972) 191, 213 Gary Becker (1992) 194, 195–6 Ronald Coase (1991) 73 Peter Diamond (2010) 179 Eugene Fama (2013) 160, 187 Milton Friedman (1976) 146, 147–8, 154, 161 Lars Peter Hansen (2013) 160 Friedrich Hayek (1974) 137 Daniel Kahneman (2002) 218, 220 Paul Krugman (2008) 180, 191 Simon Kuznets (1971) 148 Robert Lucas (1995) 202 Robert Merton (1997) 187 Edmund Phelps (2006) 213 Paul Samuelson (1970) 168 Myron Scholes (1997) 187 Vernon Smith (2002) 218 non-accelerating inflation of unemployment (NAIRU) 153–5 Nordhaus, William 171, 178 North American Free Trade Agreement 41, 187 North, Lord 23 Obama, Barack 162, 190 offshoring of jobs 41 OPEC 22 opportunity cost concept 201, 205 optimism bias and overconfidence 226–7 outsourcing 21 overlapping generations (OLG) model 178–80 Pareto, Vilfredo 182 Pareto efficiency 182 pensions and pension funds 178 permanent income hypothesis (Friedman) 148–50 Perot, Ross 41 Phelps, Edmund 154, 213 Philip, Prince 158 Pigou, A.C. 95 Pinochet, Augusto 161 political economy 28, 74, 93 population growth theories Malthus 31 Ricardo 31, 32–3 Posner, Richard 215 Predictably Irrational (Ariely, 2009) 234 prejudice economic perspective of Becker 196–7, 198–9 views of Friedman 157 price, as interaction of supply and demand (Marshall) 75–9 prices and knowledge (Hayek) 131–3 Prices and Production (Hayek, 1931) 126, 130 Principles of Economics (Marshall, 1890) 72, 76, 77–8, 87–8, 188 private savings, influence of taxation policy 43–4 private sector windfalls, impact of stimulus measures 43–4 privatisation of state-owned monopolies 21 246Index productivity, and division of labour 11–14 Prospect Theory (Kahneman) 228–32, 234 protectionism 22–3, 33–5, 41–2, 185 public goods economics 175–8 purchasing price parity (PPP) measures 186 quantitative easing 162, 163 quantity theory of money, criticism by Keynes 97 Rae, John 23 rational choice model (Becker) 197, 212–15, 216 challenge from Kahneman 221–33 rational expectations hypothesis 111, 137 Reagan, Ronald 19, 20, 139, 146, 158, 160 recession drivers of (Keynes) 101 see also Great Recession (2009) reflection effect 229 revealed preference theory 180–1 reverse elasticity 84 Ricardo, Abraham 28–9 Ricardo, David (1772–1823) 27–46, 183 attack on the Corn Laws 33–5 early life and influences 28–30 from finance to economics 30–1 global free trade 40–2 government debt 38–9 influence of Adam Smith 30 international trade and comparative advantage 35–8 key ideas 46 long-term legacy 40–4 on the general workings of the economy 31–3 on wealth creation and distribution 31–3 political career 30 population growth theories 31, 32–3 The Principles of Political Economy and Taxation (1817) 28, 31–3, 188 Ricardian equivalence 38–9 Ricardo effect 33 verdict 45–6 wine and cloth example 35, 37, 40–1 Ricardian equivalence 38–9 Ricardo effect 33 Robbins, Lionel 122, 129 Rogeberg, Ole 211 Rogoff, Kenneth 189–90 Roosevelt, Franklin D. 148 Samuelson, Paul (1915–2009) 37, 106, 137, 159, 167–92 autarky concept 184 early life and influences 169–70 economics in action 190–1 Economics: An Introductory Analysis (1948) 168, 171–3, 188–9 efficient markets 187 ethical judgements in economics 182–3 explaining trade imbalances 184–5 factor price equalisation theorem 186–7 financial economics 187 Foundations of Economic Analysis (1947) 168, 169–70 global public goods 177–8 influence of Keynes 171–2 influence on economic theory 189–90 intergenerational economics 178–80 international economics and trade 183–7 key economic theories and writings 171–87 long-term legacy 188–91 mathematical approach to economic issues 169–70 microeconomic market system 172–3, 174 multiplier effect 174–5 Index247 neoclassical synthesis 174 neo-Keynesianism 168–9, 173–5 Nobel Prize in economic sciences (1970) 168 oscillator model of business cycles 174–5 overlapping generations (OLG) model 178–80 public goods and public finance 175–8 public goods economics 175–8 revealed preference theory 180–1 understanding consumer behaviour 180–1 verdict 191–2 warrant pricing 187 welfare economics 181–3 Scholes, Myron 187 Schwartz, Anna 150–1, 162 Scottish Enlightenment 3 Second World War 95, 96 self-interest theory of Adam Smith 2–3, 6, 8–9, 20 Skidelsky, Robert 114, 128 slavery 10–11 Smith, Adam (1723–90) 1–25, 97, 230–1 A Theory of Moral Sentiments (1759) 2, 5–6 division of labour and productivity 11–14 drivers of rates of pay 12–13 early life and character 3–5 free-market mechanism of supply and demand 8–9 free international trade 13–14 from philosophy to economics 6–7 functions funded by general taxation 16 functions of the state 16–18 functions that users should pay for 16–17 idea of ‘natural liberty’ 8 idea of ‘sympathy’ of people for each other 6 key ideas 25 long-term legacy 19–23 market price of a commodity 15–16 on slavery 10–11 personal legacy 23 pin factory example 11–13 role of the state in the economy 9, 10 self-interest theory 2–3, 6, 8–9, 20 taxation principles 17–18 the evil of cartels and monopolies 10–11 the invisible hand 7–9 the market mechanism 15–16 The Wealth of Nations (1776) 2–3, 6, 7–25, 188 verdict 23–4 Smith, Vernon 218 Smoot-Hawley Tariff Act (US) 42 social security systems 179 social welfare function 182–3 socialism 134–6 sovereign debt crisis in Greece 113–14 Soviet Union, collapse of 140, 158 Sraffa, Piero 130–1 stagflation in the 1970s 154, 173–4 Standard Oil Company of New Jersey 21 state-owned monopolies, privatisation programmes 21 Statecraft (Thatcher, 2002) 19 status quo bias 227–8 stimulus measures, debate over effects of 43–4 stimulus versus austerity debate 43–4, 140–1 Stockholm School of Economics 168 Stolper, Wolfgang 184–5 Stolper–Samuelson theorem 184–5 Strachey, Lytton 94 structural unemployment 155 substitution effect, response to price change 82, 83 Summers, Anita 190 Summers, Lawrence 190 Summers, Robert 190 Sunstein, Cass 234 248Index supply and demand market mechanism 8–9, 15–16, 75–84 supply side economics 127, 201 surplus value of labour (Marx) 54–6 taxation policy influence on private savings 43–4 views of Adam Smith 16–18 taxpayers, view of government debt (Ricardo) 38–9 Thaler, Richard 232, 234, 235 Thatcher, Margaret 19, 138–9, 155, 160–1 The General Theory of Employment, Interest and Money (Keynes, 1936) 99–106 The Principles of Political Economy (Mill, 1848) 188 The Principles of Political Economy and Taxation (Ricardo, 1817) 28, 31–3, 188 The Road to Serfdom (Hayek, 1944) 135, 138, 140 The Wealth of Nations (Smith, 1776) 2–3, 6, 7–25, 188 Thinking, Fast and Slow (Kahneman, 2012) 226–7, 234 time factor and the value of capital (Hayek) 124–6 in the supply and demand model 77–9 Townshend, Charles 5, 6–7 Toyota, production systems 21 trade barriers 22–3, 41–2, 185 Corn Laws 33–5 trade imbalances, Samuelson’s explanation 184–5 trade unions 19 transient income concept 149 Treatise on Human Nature (Hume) 4 Treaty of Versailles 95–6 Tversky, Amos 218, 220, 221–5, 228–33, 235 Ulam, Stanislaw 37 uncertainty and investment volatility 104–5 unemployment causes of (Keynes) 101 frictional 155 ‘natural’ rate of (Friedman) 153–5 relationship with inflation 153–5 structural 155 United States housing market crisis (2008) 61–2, 112 import tariffs after the Wall Street Crash 42 savings and investment imbalance with China 113 trade imbalance with China 45 US Federal Reserve 111–12 action to control inflation 161 and the 2008 financial crisis 235 influence of monetary policy 159 money supply and the Great Depression (1930s) 150–2 quantitative easing (2009 onward) 162 role in the Great Depression (1930s) 159 utilitarianism 31, 182 value and costs of production 75–7 distribution of economic value (Marx) 54–6 surplus value of labour (Marx) 54–6 Voltaire 7 wages drivers of wage rates (Smith) 12–13 effects of reducing (Keynes) 101–2 relationship to rents and profits 32–3 surplus value of labour (Marx) 54–6 Wall Street Crash (1929) 23, 42 Wallich, Henry 190–1 warrant pricing (Samuelson) 187 wealth creation and distribution, view of Ricardo 31–3 Index249 welfare economics 181–3 White, Harry Dexter 108 Wilberforce, William 10 Wittgenstein, Ludwig 121 women in the workforce 202 Wood, Kingsley 106 Woolf, Leonard 94 World Bank Group 109 World Trade Organization (WTO) 22, 40–1, 185

Roosevelt) 148 New Keynesianism 159, 163 New Neoclassical Synthesis 111 Nicholas I, Tsar 52 NINJA (No Income, No Job, No Assets) homebuyers 61–2 Nixon, Richard 109, 146 Nobel laureates Kenneth Arrow (1972) 191, 213 Gary Becker (1992) 194, 195–6 Ronald Coase (1991) 73 Peter Diamond (2010) 179 Eugene Fama (2013) 160, 187 Milton Friedman (1976) 146, 147–8, 154, 161 Lars Peter Hansen (2013) 160 Friedrich Hayek (1974) 137 Daniel Kahneman (2002) 218, 220 Paul Krugman (2008) 180, 191 Simon Kuznets (1971) 148 Robert Lucas (1995) 202 Robert Merton (1997) 187 Edmund Phelps (2006) 213 Paul Samuelson (1970) 168 Myron Scholes (1997) 187 Vernon Smith (2002) 218 non-accelerating inflation of unemployment (NAIRU) 153–5 Nordhaus, William 171, 178 North American Free Trade Agreement 41, 187 North, Lord 23 Obama, Barack 162, 190 offshoring of jobs 41 OPEC 22 opportunity cost concept 201, 205 optimism bias and overconfidence 226–7 outsourcing 21 overlapping generations (OLG) model 178–80 Pareto, Vilfredo 182 Pareto efficiency 182 pensions and pension funds 178 permanent income hypothesis (Friedman) 148–50 Perot, Ross 41 Phelps, Edmund 154, 213 Philip, Prince 158 Pigou, A.C. 95 Pinochet, Augusto 161 political economy 28, 74, 93 population growth theories Malthus 31 Ricardo 31, 32–3 Posner, Richard 215 Predictably Irrational (Ariely, 2009) 234 prejudice economic perspective of Becker 196–7, 198–9 views of Friedman 157 price, as interaction of supply and demand (Marshall) 75–9 prices and knowledge (Hayek) 131–3 Prices and Production (Hayek, 1931) 126, 130 Principles of Economics (Marshall, 1890) 72, 76, 77–8, 87–8, 188 private savings, influence of taxation policy 43–4 private sector windfalls, impact of stimulus measures 43–4 privatisation of state-owned monopolies 21 246Index productivity, and division of labour 11–14 Prospect Theory (Kahneman) 228–32, 234 protectionism 22–3, 33–5, 41–2, 185 public goods economics 175–8 purchasing price parity (PPP) measures 186 quantitative easing 162, 163 quantity theory of money, criticism by Keynes 97 Rae, John 23 rational choice model (Becker) 197, 212–15, 216 challenge from Kahneman 221–33 rational expectations hypothesis 111, 137 Reagan, Ronald 19, 20, 139, 146, 158, 160 recession drivers of (Keynes) 101 see also Great Recession (2009) reflection effect 229 revealed preference theory 180–1 reverse elasticity 84 Ricardo, Abraham 28–9 Ricardo, David (1772–1823) 27–46, 183 attack on the Corn Laws 33–5 early life and influences 28–30 from finance to economics 30–1 global free trade 40–2 government debt 38–9 influence of Adam Smith 30 international trade and comparative advantage 35–8 key ideas 46 long-term legacy 40–4 on the general workings of the economy 31–3 on wealth creation and distribution 31–3 political career 30 population growth theories 31, 32–3 The Principles of Political Economy and Taxation (1817) 28, 31–3, 188 Ricardian equivalence 38–9 Ricardo effect 33 verdict 45–6 wine and cloth example 35, 37, 40–1 Ricardian equivalence 38–9 Ricardo effect 33 Robbins, Lionel 122, 129 Rogeberg, Ole 211 Rogoff, Kenneth 189–90 Roosevelt, Franklin D. 148 Samuelson, Paul (1915–2009) 37, 106, 137, 159, 167–92 autarky concept 184 early life and influences 169–70 economics in action 190–1 Economics: An Introductory Analysis (1948) 168, 171–3, 188–9 efficient markets 187 ethical judgements in economics 182–3 explaining trade imbalances 184–5 factor price equalisation theorem 186–7 financial economics 187 Foundations of Economic Analysis (1947) 168, 169–70 global public goods 177–8 influence of Keynes 171–2 influence on economic theory 189–90 intergenerational economics 178–80 international economics and trade 183–7 key economic theories and writings 171–87 long-term legacy 188–91 mathematical approach to economic issues 169–70 microeconomic market system 172–3, 174 multiplier effect 174–5 Index247 neoclassical synthesis 174 neo-Keynesianism 168–9, 173–5 Nobel Prize in economic sciences (1970) 168 oscillator model of business cycles 174–5 overlapping generations (OLG) model 178–80 public goods and public finance 175–8 public goods economics 175–8 revealed preference theory 180–1 understanding consumer behaviour 180–1 verdict 191–2 warrant pricing 187 welfare economics 181–3 Scholes, Myron 187 Schwartz, Anna 150–1, 162 Scottish Enlightenment 3 Second World War 95, 96 self-interest theory of Adam Smith 2–3, 6, 8–9, 20 Skidelsky, Robert 114, 128 slavery 10–11 Smith, Adam (1723–90) 1–25, 97, 230–1 A Theory of Moral Sentiments (1759) 2, 5–6 division of labour and productivity 11–14 drivers of rates of pay 12–13 early life and character 3–5 free-market mechanism of supply and demand 8–9 free international trade 13–14 from philosophy to economics 6–7 functions funded by general taxation 16 functions of the state 16–18 functions that users should pay for 16–17 idea of ‘natural liberty’ 8 idea of ‘sympathy’ of people for each other 6 key ideas 25 long-term legacy 19–23 market price of a commodity 15–16 on slavery 10–11 personal legacy 23 pin factory example 11–13 role of the state in the economy 9, 10 self-interest theory 2–3, 6, 8–9, 20 taxation principles 17–18 the evil of cartels and monopolies 10–11 the invisible hand 7–9 the market mechanism 15–16 The Wealth of Nations (1776) 2–3, 6, 7–25, 188 verdict 23–4 Smith, Vernon 218 Smoot-Hawley Tariff Act (US) 42 social security systems 179 social welfare function 182–3 socialism 134–6 sovereign debt crisis in Greece 113–14 Soviet Union, collapse of 140, 158 Sraffa, Piero 130–1 stagflation in the 1970s 154, 173–4 Standard Oil Company of New Jersey 21 state-owned monopolies, privatisation programmes 21 Statecraft (Thatcher, 2002) 19 status quo bias 227–8 stimulus measures, debate over effects of 43–4 stimulus versus austerity debate 43–4, 140–1 Stockholm School of Economics 168 Stolper, Wolfgang 184–5 Stolper–Samuelson theorem 184–5 Strachey, Lytton 94 structural unemployment 155 substitution effect, response to price change 82, 83 Summers, Anita 190 Summers, Lawrence 190 Summers, Robert 190 Sunstein, Cass 234 248Index supply and demand market mechanism 8–9, 15–16, 75–84 supply side economics 127, 201 surplus value of labour (Marx) 54–6 taxation policy influence on private savings 43–4 views of Adam Smith 16–18 taxpayers, view of government debt (Ricardo) 38–9 Thaler, Richard 232, 234, 235 Thatcher, Margaret 19, 138–9, 155, 160–1 The General Theory of Employment, Interest and Money (Keynes, 1936) 99–106 The Principles of Political Economy (Mill, 1848) 188 The Principles of Political Economy and Taxation (Ricardo, 1817) 28, 31–3, 188 The Road to Serfdom (Hayek, 1944) 135, 138, 140 The Wealth of Nations (Smith, 1776) 2–3, 6, 7–25, 188 Thinking, Fast and Slow (Kahneman, 2012) 226–7, 234 time factor and the value of capital (Hayek) 124–6 in the supply and demand model 77–9 Townshend, Charles 5, 6–7 Toyota, production systems 21 trade barriers 22–3, 41–2, 185 Corn Laws 33–5 trade imbalances, Samuelson’s explanation 184–5 trade unions 19 transient income concept 149 Treatise on Human Nature (Hume) 4 Treaty of Versailles 95–6 Tversky, Amos 218, 220, 221–5, 228–33, 235 Ulam, Stanislaw 37 uncertainty and investment volatility 104–5 unemployment causes of (Keynes) 101 frictional 155 ‘natural’ rate of (Friedman) 153–5 relationship with inflation 153–5 structural 155 United States housing market crisis (2008) 61–2, 112 import tariffs after the Wall Street Crash 42 savings and investment imbalance with China 113 trade imbalance with China 45 US Federal Reserve 111–12 action to control inflation 161 and the 2008 financial crisis 235 influence of monetary policy 159 money supply and the Great Depression (1930s) 150–2 quantitative easing (2009 onward) 162 role in the Great Depression (1930s) 159 utilitarianism 31, 182 value and costs of production 75–7 distribution of economic value (Marx) 54–6 surplus value of labour (Marx) 54–6 Voltaire 7 wages drivers of wage rates (Smith) 12–13 effects of reducing (Keynes) 101–2 relationship to rents and profits 32–3 surplus value of labour (Marx) 54–6 Wall Street Crash (1929) 23, 42 Wallich, Henry 190–1 warrant pricing (Samuelson) 187 wealth creation and distribution, view of Ricardo 31–3 Index249 welfare economics 181–3 White, Harry Dexter 108 Wilberforce, William 10 Wittgenstein, Ludwig 121 women in the workforce 202 Wood, Kingsley 106 Woolf, Leonard 94 World Bank Group 109 World Trade Organization (WTO) 22, 40–1, 185


pages: 317 words: 84,400

Automate This: How Algorithms Came to Rule Our World by Christopher Steiner

23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, Apollo 13, backtesting, Bear Stearns, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, call centre, Charles Babbage, cloud computing, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, financial engineering, Flash crash, G4S, Gödel, Escher, Bach, Hacker News, High speed trading, Howard Rheingold, index fund, Isaac Newton, Jim Simons, John Markoff, John Maynard Keynes: technological unemployment, knowledge economy, late fees, machine translation, Marc Andreessen, Mark Zuckerberg, market bubble, Max Levchin, medical residency, money market fund, Myron Scholes, Narrative Science, PageRank, pattern recognition, Paul Graham, Pierre-Simon Laplace, prediction markets, proprietary trading, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Robert Mercer, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator

About a year after the men had put their algorithm to work, a thunderclap sounded above Wall Street. In 1973 Fischer Black and Myron Scholes, both professors at the University of Chicago, published a paper that included what would become known as the Black-Scholes formula, which told its users exactly how much an option was worth. Algorithms based on Black-Scholes would over the course of decades reshape Wall Street and bring a flock of like-minded men—mathematicians and engineers—to the front lines of the financial world. The Black-Scholes solution, quite similar to Peterffy’s, earned Myron Scholes a Nobel Prize in 1997 (Black had died in 1995). Change didn’t happen overnight.

In 1807, Joseph Fourier published his heat equation, which described the distribution of heat over time within a metal plate that had been warmed from one point. Fourier’s periodic function built on the work of Euler and Daniel Bernoulli to develop a series of trigonometric integrals—now called a Fourier series—that have proven incredibly handy in dozens of applications. Among those who profited from Fourier’s work were Fischer Black and Myron Scholes, who used a variation of Fourier’s heat equation to create their algorithm that would go on to reorder Wall Street and earn Scholes a Nobel Prize.21 An earlier Nobel was awarded to Herbert A. Hauptman and Jerome Karle in 1985 for their work utilizing Fourier series to model crystalline structures using X-rays.22 Fourier’s work has also proved useful in decoding music, a fact Brown picked up in a math journal in the mid-1990s.

., 154 Rolling Stones, 86 Rondo, Rajon, 143 Ross, Robert, 143–44 Roth, Al, 147–49 Rothschild, Nathan, 121–22 Royal Society, London, 59 RSB40, 143 runners, 39, 122 Russia, 69, 193 intelligence of, 136 Russian debt default of 1998, 64 Rutgers University, 144 Ryan, Lee, 79 Saint Petersburg Academy of Sciences, 69 Sam Goody, 83 Sandberg, Martin (Max Martin), 88–89 Sandholm, Tuomas: organ donor matching algorithm of, 147–51 poker algorithm of, 128–33, 147, 150 S&P 100 index, 40–41 S&P 500 index, 40–41, 51, 114–15, 218 Santa Cruz, Calif., 90, 95, 99 satellites, 60 Savage Beast, 83 Saverin, Eduardo, 199 Scholes, Myron, 23, 62, 105–6 schools, matching algorithm for, 147–48 Schubert, Franz, 98 Schwartz, Pepper, 144 science, education in, 139–40, 218–20 scientists, on Wall Street, 46, 186 Scott, Riley, 9 scripts, algorithms for writing, 76 Seattle, Wash., 192, 207 securities, 113, 114–15 mortgage-backed, 203 options on, 21 Securities and Exchange Commission (SEC), 185 semiconductors, 60, 186 sentence structure, 62 Sequoia Capital, 158 Seven Bridges of Königsberg, 69, 111 Shannon, Claude, 73–74 Shuruppak, 55 Silicon Valley, 53, 81, 90, 116, 188, 189, 215 hackers in, 8 resurgence of, 198–211, 216 Y Combinator program in, 9, 207 silver, 27 Simons, James, 179–80, 208, 219 Simpson, O.


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, AOL-Time Warner, assortative mating, Benoit Mandelbrot, book value, Brownian motion, capital asset pricing model, Carl Icahn, carried interest, Charles Lindbergh, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, longitudinal study, Louis Bachelier, low interest rates, Monty Hall problem, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Ronald Coase, short squeeze, Silicon Valley, Steve Jobs, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, tontine, transaction costs, vertical integration, zero-sum game

Aside from an interesting reversal of conventional wisdom, the story of Bachelier’s discovery is also the story of the two most important risk management strategies—options and diversification. Bachelier’s ability to describe the movement of stock prices mathematically as “random walks” provided the foundation for him to crudely price the option contracts that were then trading in Paris and had traded since the seventeenth century in Amsterdam. Myron Scholes and Robert Merton would win the Nobel Prize in 1997 for a pricing formula that corresponds to (and considerably improves upon) the mostly forgotten logic laid down by Bachelier. And Bachelier’s ability to describe stock prices moving about at random ultimately gave rise to portfolio theory by putting forward the notion that it was hopeless to try to beat the market—the best you could do was hold a diversified portfolio.

Two particularly good textbooks on options are McDonald, Robert L. Derivatives Markets. Boston: Addison-Wesley, 2006; and Hull, John, Sirimon Treepongkaruna, David Colwell, Richard Heaney, and David Pitt. Fundamentals of Futures and Options Markets. New York: Pearson, 2013. Critical important early papers on options include Black, Fischer, and Myron Scholes. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81, no. 3 (May/June 1973): 637–54; and Merton, Robert C. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science 4, no. 1 (Spring 1973): 141–83. An elegant treatment of these topics is provided in Merton, Robert C.

., and Martha Parke Firestone, 118–19 marriages as mergers, 104–6 in modern America, 105–6 in Renaissance Florence, 100–101 in Thailand, 105 “Romance Without Finance” (Grimes, Little Feat), 98–99 Room with a View, A (Forster), 8, 89–91 Rothschild family, 8, 100, 104–5 Hannah Mayer and marriage, 105 James and marriage to Nicky Hilton, 106 Mayer Amschel and marriage, 104 Royal Coat of Arms of the United Kingdom, 40 Russell, Bertrand, 14 S Salmon, Felix, 130 Schjeldahl, Peter, 32, 129 Scholes, Myron, 40 Seize the Day (Bellow), 48–49 Shakespeare, William, 8, 122 Sheldon, Sidney, 96 Shenk, Joshua Wolf, 139 Shkreli, Martin, 166 Shleifer, Andrei, 77 Simpsons, The (TV show), 28 Sliding Doors (film), 13 Sloan, Alfred P., 117 Smith, Adam, 121–22 Smith, Fred, 44–45 Snow, C. P., 175–77 Socrates, 168 Stevens, Wallace, xi, 7, 32–34, 170 disorder and chaos, 33–34 insurance executive, 32–33 T talent, etymology of, 58–59, 74 “Tale of Beryn” (Chaucer), 74 Talmud, 52 Thales of Miletus, 7, 42–43, 162, 177 Tiger Moms, 95 Tolstoy, Leo, 9, 162–64 tontines, 28–30 Tontine Coffee House, 28 Tootsie Roll Industries, 78–80, 83–85 transaction cost approach to mergers, 115 Trilogy of Desire (Dreiser), 165 Trollope, Anthony, 7, 38, 175 Trump, Donald, 127, 152 Turner, Ted, 108 “Two Cultures” (Snow), 175 “Two Tramps in Mud Time” (Frost), xiii Tynan, Kenneth, 96 U Ulysses (Joyce), 91–92 V Vaillant, George, 138–39 value creation and valuation, 7, 59 accounting vs. finance, 64 alpha generation or getting paid for beta, 71–73 destruction of value, 63 discounted cash flows, 65 measuring value creation, 64–67 stewardship and, 61–63, 74 terminal values, 66–67 weighted average cost of capital, 65 value of education, 65–66 value of housing, 66 van Doetechum, Lucas, 58 (illus.), 59 van Eyck, Jan, 97 (illus.), 103 Vega, Joseph de la, 5–6, 43–44 venture capital, 73, 82 Vishny, Robert, 77 W Wall Street (film), 165, 166 Warhol, Andy, 129 Washington, George, 142–43, 145 Watson, Thomas, 138 Wealth of Nations, The (Smith), 121 Weaver, Sigourney, 97–98 Wells Fargo, 80 Wesley, John, 63 West, Kanye, 99 Wheel of Fortune (TV show), 17–18 White, Vanna, 18 Whitney Museum of Modern Art, 140 Wilder, Gene, 94 Wilson, E.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Alan Greenspan, AOL-Time Warner, Benoit Mandelbrot, Black-Scholes formula, book value, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, confounding variable, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, equity risk premium, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, it's over 9,000, John Bogle, John Nash: game theory, Larry Ellison, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Plato's cave, Ponzi scheme, power law, price anchoring, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, Richard Thaler, risk free rate, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, two and twenty, ultimatum game, UUNET, Vanguard fund, Yogi Berra

The considerations for a stock include these plus others having to do with the rise and fall of stock prices. Although the practice and theory of insurance have a long history (Lloyd’s of London dates from the late seventeenth century), it wasn’t until 1973 that a way was found to rationally assign costs to options. In that year Fischer Black and Myron Scholes published a formula that, although much refined since, is still the basic valuation tool for options of all sorts. Their work and that of Robert Merton won the Nobel prize for economics in 1997. Louis Bachelier, whom I mentioned in chapter 4, also devised a formula for options more than one hundred years ago.

They can short-sell, buy on margin, use various other sorts of leverage, or engage in complicated arbitrage (the near simultaneous buying and selling of the same stock, bond, commodity, or anything else, in order to profit from tiny price discrepancies). They’re called “hedge funds” because many of them try to minimize the risks of wealthy investors. Others fail to hedge their bets at all. A prime example of the latter is the collapse in 1998 of Long-Term Capital Management, a hedge fund, two of whose founding partners, Robert Merton and Myron Scholes, were the aforementioned Nobel prize winners who, together with Fischer Black, derived the celebrated formula for pricing options. Despite the presence of such seminal thinkers on the board of LTCM, the debacle roiled the world’s financial markets and, had not emergency measures been enacted, might have seriously damaged them.

Petersburg paradox stock-newsletter scam based on stock options and probability theory progressive taxation psychology anchoring effect availability error behind buying more stock as price drops confirmation bias counterproductive behavior endowment effect scandal cover-ups status quo bias trying to outguess the masses publicly available information. see also common knowledge accounting scandals and Efficient market hypothesis and pump and dump strategy put options. see also stock options buying/selling puts on S&P as hedge against decline of stock selling strategies for using valuation tools for pyramid schemes quarterly estimates RagingBull railroads, depression of Ramsey, Frank random events appearance of order in Efficient market hypothesis and investing with meaning vs. predictability random sequences A Random Walk Down Wall Street (Malkiel) random walk theory rate of return arithmetic mean outstripping geometric mean Beta (B) values and determining expected excess return fixed, with treasury bills IPO purchases/sales and median vs. average minimizing risk without reducing “single index model” and standard deviation and stocks vs. bonds ratio of the excess return on a portfolio reality, inability to model reforms, accounting practices regression to the mean as contrarian measure Sport Illustrated cover jinx as illustration of widespread examples of Reminiscences of a Stock Operator (Lefevre) resistance levels risks aversion, illustrated by online chatrooms diversification and graphing against expected value (Markowitz optimal portfolios) market-related and stock-related mathematics of minimizing without hurting rate of return options and rate of return and selling short and stocks vs. bonds taking unnecessary Roschach blots Ross, Sheldon roulette rules. see trading strategies rules of thumb, as time saving device rumors conclusions based on not being able to ignore when considering investments S-shaped curve, P/E ratio S&P 500, buying/selling puts Salomon Smith Barney Samuelson, Paul scaling laws. see power law scams card tricks Ponzi schemes, chain letters, and pyramid schemes sports betting scam stock-newsletter scam scandals. see accounting scandals; fraud Scholes, Myron script, sports scam secrecy complexity resulting from lack of investment strategies and Securities and Exchange Commission (SEC) charging WorldCom of inflated earnings decimalization reforms parable of common knowledge and Security Analysis (Graham and Dodd) self-fulfilling beliefs selling on the margin. see short selling sensitive dependence, nonlinear systems sequences complexity of (mathematics of) random sequences random walk theory and share price, P/E ratio. see also prices, of stocks Sharpe, William Sherra, Jesse Shiller, Robert short selling short-term investors shorting and distorting strategy Shubik, Martin Sidgmore, John Siegel, Jeremy “single index model” (Sharpe) six sigma performance Slovic, Paul Sluggish Market Hypothesis Smith, Adam socially regressive funds Spitzer, Eliot Sport Illustrated spread, making money on St.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business logic, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, currency risk, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Bogle, John Meriwether, junk bonds, locking in a profit, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Salesforce, Satyajit Das, shareholder value, short selling, short squeeze, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

DAS_C02.QXP 8/7/06 22 4:22 PM Page 22 Tr a d e r s , G u n s & M o n e y In Chicago, Eugene Fama and his colleagues developed the efficient markets hypothesis. Merton Miller developed theories on dividends, borrowing by companies and the effect of taxes. Against this background of febrile activity, in 1973, three academics – Fischer Black, Myron Scholes and Robert Merton – developed a model to price options. Scholes and Merton were to receive the Swedish Central Bank’s Prize for achievement in economics (often mistakenly referred to as the Nobel Prize). In Business Finance, there was a lecture on the Black–Scholes option pricing model. We had no clue what an option was and eventually, someone asked about options at a tutorial.

If we could find an equal but opposite transaction to our client’s requirements at the very moment they deigned to trade, then we would. It just never happened that way. This meant we were left with surrogate hedges. The surrogates proved true to their name, sometimes proving imperfect. We had begun to make markets in options. In the early 1980s, Hayne Leland and Mark Rubinstein had built on the work done by Fischer Black, Myron Scholes and Robert Merton on pricing options. They had developed a way of hedging options – option replication or delta hedging. The model made assumptions about the workings of markets but the markets just hadn’t read the assumptions. I realized that these hedging models would come apart under real-world conditions, especially when things went crazy.

The key principals (in addition to Meriwether) included DAS_C06.QXP 8/7/06 168 4:43 PM Page 168 Tr a d e r s , G u n s & M o n e y Eric Rosenfield, Lawrence Hilibrand, William Krasker, Victor Haghani, Greg Hawkins and David Modest. LTCM principals included Nobel Prize winners Robert Merton and Myron Scholes and former regulators including ex-Federal Reserve Board Vice Chairman David Mullins. The core group had worked together in Salomon Brother’s fixed income arbitrage operations. The individuals did not fit the mould of traditional rough and tumble traders: most were highly qualified, holding PhDs in economics, finance, mathematics, science or related disciplines.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

3D printing, Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Glass-Steagall Act, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, market bubble, market clearing, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

They were bets that committed an option holder to buy or sell an option by a certain date. The potential buyer was said to have a long position and the seller a short position. The pricing of options became a subject of study. In 1973, the very same year in which option trading became more regular, two economists, Fisher Black and Myron Scholes, presented an analysis which put options in a broader class of contingent assets the price of which could be determined by sophisticated probability analysis.9 (Fisher Black left his job at MIT to join Solomon Brothers. When asked what persuaded him, he replied, “They added a zero to my salary.”)

Metzler, eds, Carnegie-Rochester Conference Series on Public Policy, 1.1 (1976): 19–46. 8.See, for instance, Frank Smets and Raf Wouters, An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area, ECB Working Paper 171 (European Central Bank, Frankfurt, 2002). 9.Fisher Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, 81.3 (May–June 1973): 637–54. 6 The New Globalization 1.For some historical background, see Meghnad Desai, Marx’s Revenge: The Resurgence of Capitalism and the Death of Statist Socialism (Verso, London, 2002). 2.For background on the Asian crisis see Julia Leung, The Tides of Capital: How Asia Surmounted the Crisis and Is Now Guiding World Recovery (Official Monetary and Financial Institutions Forum, London, 2015). 3.See Roger Lowenstein, When Genius Failed: Rise and Fall of Long Term Capital Management (Fourth Estate, New York, 2002). 4.J.

(i), (ii) Rothschilds (i) Roubini, Nouriel (i) Royal Charter, grants of monopoly (i) rules of competition (i) Russia (i), (ii) Russian revolution (i), (ii) saltwater economists (i), (ii) Samuelson, Paul (i), (ii), (iii), (iv) “Analytical Aspects of an Anti–Inflation Policy” (with Robert Solow) (i) Say, Jean-Baptiste (i) Say’s Law (i), (ii) scarcity value (i) Scholes, Myron (i), (ii), (iii) Schumpeter, Joseph (i), (ii), (iii), (iv) The Theory of Economic Development (i) Schwartz, Anna, A Monetary History of the United States (with Milton Friedman) (i) Scottish Enlightenment (i) Second International (i) secular stagnation (i) securitization of mortgages (i) seigniorage privilege (i) self-interest (i) self-organizing society (i) self-sufficiency (i) service sector (i), (ii) servomechanism (i) shadow banking structure (i) shares (i) Sherman Act (i) Shiller, Robert (i), (ii) shocks (i), (ii), (iii) contagion (i) debt crises (i) political (i) see also oil shock short cycles (i) short-run rate of interest (i) Silesian weavers (i) single global currency (i) skills, types needed (i), (ii) slack (i) slavery, abolition of (i) Slutsky, Eugen (i), (ii), (iii) Smith, Adam (i), (ii), (iii), (iv), (v) the founding of the political economy (i) An Inquiry into the Nature and Causes of the Wealth of Nations (i), (ii) The Theory of Moral Sentiments (i), (ii) social science, founding (i) Socialist International (i) society regulation (i) self-organizing (i) Solow, Robert (i), (ii), (iii) “Analytical Aspects of an Anti–Inflation Policy” (with Paul Samuelson) (i) sovereign debt crises (i), (ii) Soviet Union, break up (i), (ii) speculation (i) speculative motive (i), (ii) stag-deflation (i) stagflation (i), (ii), (iii) Stalin, Joseph (i) static vision (i) statistics (i) development of (i) historical research (i) usefulness (i) sterling, as reserve currency (i) stochastic calculus (i) stock market crash, London (i) stock markets bull run (i) competition (i) computer technology (i) stock prices, randomness (i) Stockholm School (i) Stop-Go cycle (i) policy (i) Summers, Larry (i) surplus value (i) sustainable recovery, sources of (i) Sutcliffe, Robert (i), (ii) sweetwater economists (i), (ii) Sweezy, Paul (i) System of Natural Liberty (i) T bills (i), (ii), (iii) tatonnement (i) tax cut, US (i) technical progress, role of (i) technological innovations author’s experiences (i) displacement effect (i), (ii) and manufacturing location (i) see also computer technology technological shocks (i) telecommunications (i) Thailand, Crisis, 1997 (i) Thatcher, Margaret (i) theories, need for validation (i) theory of economic behavior of the household (i) Thornton, Henry (i) time, role of (i) time series data (i) Tinbergen, Jan (i) Tobin, James (i) Tobin tax (i) total money supply, and prices (i) total output, heterogeneity (i) trade doctrine see under Ricardo trade-off, unemployment and inflation (i) trade surpluses, banking (i) trade unions effect on money wage (i) as harmful (i) power (i) rise of (i) strengthening (i) weakening (i) transactions motive (i) transmission mechanism (i) Troubled Assets Recovery Program (TARP) (i) true costs of production (i) Truman, Harry (i) trusts (i) Tugan-Baranowsky, Michael (i) Turkey (i) Turner, Adair, Lord (i) Two Treatises on Government (Locke) (i) uncertainty (i) underemployment equilibrium (i), (ii), (iii) undersaving (i), (ii) unearned income (i) unemployment aggregate level (i) cycles (i) effect of wages (i) explaining (i) and inflation (i) involuntary (i) and money wage (i) natural rate (i) see also Keynesian models unifying principle (i) unique static equilibrium, and moving data (i) unit labor costs (i) United Kingdom budget deficit elimination (i) deindustrialization (i) economic trajectory (i) Great Depression (i) monetarism (i) recovery strategy (i) see also Britain United Nations Industrial Development Organization (UNIDO) (i) United States budget deficit (i) deindustrialization (i) econometric modeling (i) economic trajectory (i) economic weakness, post WWI (i) fiscal boost (i) Gold Standard (i) Great Depression (i) interest rates (i) Keynesianism (i) post-World War I power (i) post-World War II (i) Progressive Movement (i) prosperity (i) recovery strategy (i) seigniorage privilege (i) tax cut (i) trade deficit (i) welfare state expansion (i) westward expansion (i) withdrawal of currency (i) see also America unorthodoxy (i) urbanization (i) US House of Representatives, Greenspan’s testimony (i) usury defining (i) laws (i) prohibition (i), (ii) utopianism (i), (ii) valuation of assets, theory of (i) of capital (i) value vs.price (i) as price (i) relative (i), (ii) value added (i) value of goods, determination (i) variable costs (i) variables (i) Vietnam War (i) visions of economy (i) vocabulary, economic (i), (ii), (iii) volition (i) wage agreements, voluntary (i) demands, post-World War I (i) downward trend (i) effect on unemployment (i) rates, and unemployment (i) restraint (i) rises (i) share: declining (i); developed and developing economies (i); rise in (i), (ii) wage/profit distinction (i) units (i), (ii) see also money wages; real wages Walras, Antoine Auguste (i) Walras, Léon (i), (ii) Walrasian model (i) wars, financing (i) wealth distribution (i) inequality of (i) indicators (i) Smith’s theory (i) weaving, mechanization (i) welfare economics (i) welfare state, levels of support (i) White, Harry (i) Wicksell, Knut (i), (ii) basis of Hayek’s theory (i) later development of ideas (i) Wicksellian boom, developing countries (i) Wicksellian cycle, combined with Kondratieff cycle (i) William III (i) women, in workforce (i) workers dependence on capitalists (i) living standards (i) migration (i) productive/unproductive (i) workforce, recruitment of women (i) World Trade Organization (WTO) (i), (ii) World War I (i) World War II, outbreak (i) yields (i) Zombie firms (i)


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Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, impact investing, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, low interest rates, margin call, Mark Zuckerberg, McMansion, Minsky moment, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Thales of Miletus, the long tail, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

The second impetus behind the derivatives explosion came from another theoretical breakthrough. Options pricing had always been a bit finger-in-the-wind before: there was no good way to put a value on the right to buy or sell something in the future. In 1973 a trio of American academics—Fischer Black, Myron Scholes, and Robert Merton—cracked the problem of what to pay for an option. The answer they came up with, expressed as what is now known as the Black-Scholes equation, was based on a simple idea: two things that had identical outcomes ought to cost the same. The price of the option ought to be the same as whatever it cost to construct an investment portfolio that achieved the same end.

Talking about the moves that have been made to make banks safer, he worries that people tend to drive four-wheel-drive vehicles faster because they have the comfort of additional safety. The automotive industry was where the young Merton intended to make his career; he studied engineering at Columbia University. But economics and finance were to claim him. Merton’s name was made in the 1970s, with work that paralleled research by two older academics, Fischer Black and Myron Scholes. Together the three men cracked the problem of how to price an option, a financial instrument that gives the buyer the right, but not the obligation, to buy or sell an underlying asset. The question of what price to pay for an option was one to which there was no rigorous answer until Black, Scholes, and Merton came along.

., 32 Keys, Benjamin, 48 Kharroubi, Enisse, 79 Kickstarter, 172 King, Stephen, 99 Klein, David, 182 Krugman, Paul, xv Lahoud, Sal, 166 Lang, Luke, 153, 161–162 Laplanche, Renaud, 179, 184, 188, 190, 193–194, 196–197 Latency, 53 Law of large numbers, 17 Layering, 57 Left-digit bias, 46 Lehman Brothers, x, 44, 65 Lending direct, 84 marketplace, 184 payday, 200 relationship-based, 11, 151, 206–208 secured, xiv, 76 unsecured, 206 See also Loans; Peer-to-peer lending Lending Club, 172, 179–180, 182–184, 187, 189, 194–195, 197 Leonardo of Pisa (Fibonacci), 19 Lerner, Josh, 59 Lethal pandemic, risk-modeling for demographic profile, 230 exceedance-probability curve, 231–232, 232 figure 3 historical data, 228–229 infectiousness and virulence, 229–230 location of outbreak, 230–231 Leverage, 51, 70–71, 80, 186, 188 Leverage ratio, 76–77 Lewis, Michael, 57 Liber Abaci or Book of Calculation (Fibonacci), 19 LIBOR (London Interbank Offered Rate), 41 Liebman, Jeffrey, 98 Life expectancy government reaction to, 128–129 projections of, 124–127, 126 figure 2 ratio of young to older people, 127–128 Life-insurance policies, 142 Life-settlements industry, 142–143 Life table, 20 Limited liability, 212 Liquidity, 12–14, 39, 185–186 List, John, 109 The Little Book of Behavioral Investing (Montier), 156 Lo, Andrew, 113–115, 117–123 Loans low-documentation, 48–49 secured, 76 small business, 181, 216 student, 164, 166–167, 169–171, 182 syndicated, 41 Victory Loans, 28 See also Lending; Peer-to-Peer lending Logistic regression, 201 London, early fire insurance in, 16–17 London, Great Fire of, 16 London Interbank Offered Rate (LIBOR), 41 Long-Term Capital Management, 123 Longevity, betting on, 143–144 Loss aversion, 136 Lotteries, 212, 213 Low-documentation loans, 48–49 Lumni, 165, 168, 175 Lustgarten, Anders, 111 Lynn, Jeff, 160–161 Mack, John, 180 Mahwah, New Jersey, 52, 53 Marginal borrowers assessment of, 216–217 behavioral finance and, 208–214 industrialization of credit, 206 microfinance and, 203 savings schemes, 209–214 small businesses, 215–219 unsecured lending to, 206 Wonga, 203, 205, 208 Marginal borrowers (continued) ZestFinance, 199, 202, 205–206 Maritime piracy, solutions to, 151–152 Maritime trade, role of in history of finance, 3, 7–8, 14, 17, 23 Market makers, 15–16, 55 MarketInvoice, 195, 207, 217–218 Marketplace lending, 184 Markowitz, Harry, 118 Massachusetts, use of inflation-protected bonds in, 26 Massachusetts, use of social-impact bonds in, 98 Matching engine, 52 Maturity transformation, 12–13, 187–188, 193 McKinsey & Company, ix, 42 Mercator Advisory Group, 203 Merrill, Charles, 28 Merrill, Douglas, 199, 201 Merrill Lynch, 28 Merton, Robert, 31, 113–114, 123–124, 129–132, 142, 145 Mian, Atif, 204 Michigan, University of, financial survey by, 134–135 Microfinance, 203 Micropayment model, 217 Microwave technology, 53 The Million Adventure, 213–214 Minsky, Hyman, 42 Minsky moment, 42 Mississippi scheme, 36 Mitchell, Justin, 166–167 Momentum Ignition, 57 Monaco, modeling risk of earthquake in, 227 Money, history of, 4–5 Money illusion, 73–74 Money laundering, 192 Money-market funds, 43, 44 Monkeys, Yale University study of loss aversion with, 136 Montier, James, 156–157 Moody, John, 24 Moody’s, 24, 235 Moore’s law, 114 Morgan Stanley, 188 Mortgage-backed securities, 49, 233 Mortgage credit by ZIP code, study of, 204 Mortgage debt, role of in 2007–2008 crisis, 69–70 Mortgage products, unsound, 36–37 Mortgage securitization, 47 Multisystemic therapy, 96 Munnell, Alicia, 129 Naked credit-default swaps, 143 Nature Biotechnology, on drug-development megafunds, 118 “Neglected Risks, Financial Innovation and Financial Fragility” (Gennaioli, Shleifer, and Vishny), 42 Network effects, 181 New York, skyscraper craze in, 74–75 New York City, prisoner-rehabilitation program in, 108 New York Stock Exchange (NYSE), 31, 52, 53, 61, 64 New York Times, Merrill Lynch ad in, 28 Noncorrelated assets, 122 Nonprofits, growth of in United States, 105–106 Northern Rock, x NYMEX, 60 NYSE Euronext, 52 NYSE (New York Stock Exchange), 31, 52, 53, 61, 64 OECD (Organization for Economic Co-operation and Development), 128, 147 Oldfield, Sean, 67–68, 80–84 OnDeck, 216–218 One Service, 94–95, 105, 112 Operating expense ratio, 188–189 Options, 15, 124 Order-to-trade ratios, 63 Oregon, interest in income-share agreements, 172, 176 Organization for Economic Co-operation and Development (OECD), 128, 147 Overtrading, 24 Packard, Norman, 60 Pandit, Vikram, 184 Park, Sun Young, 233 Partnership mortgage, 81 Pasion, 11 Pave, 166–168, 173, 175, 182 Payday lending Consumer Financial Protection Bureau, survey on, 200 information on applicants, acquisition of, 202 underwriting of, 201 PayPal, 219 Peak child, 127 Peak risk, 228 Peer-to-peer lending advantages of, 187–189 auction system, 195 big investors in, 183 borrowers, assessment of, 197 in Britain, 181 commercial mortgages, 181 CommonBond, 182, 184, 197 consumer credit, 181 diversification, 196 explained, 180 Funding Circle, 181–182, 189, 197 investors in, 195 Lending Club, 179–180, 182–184, 187, 189, 194–195, 197 network effects, 181 ordinary savers and, 184 Prosper, 181, 187, 195 RateSetter, 181, 187, 196 Relendex, 181 risk management, 195–197 securitization, 183–184, 196 Peer-to-peer lending (continued) small business loans, 181 SoFi, 184 student loans, 182 Zopa, 181, 187, 188, 195 Pensions, cost of, 125–126 Perry, Rick, 142–143 Peterborough, England, social-impact bond pilot in, 90–92, 94–95, 104–105, 112 Petri, Tom, 172 Pharmaceuticals, decline of investment in, 114–115 Piracy Reporting Centre, International Maritime Bureau, 151 Polese, Kim, 210 Poor, Henry Varnum, 24 “Portfolio Selection” (Markowitz), 118 Prediction Company, 60–61 Preferred shares, 25 Prepaid cards, 203 Present value of cash flows, 19 Prime borrowers, 197 Prince, Chuck, 50–51, 62 Principal-agent problem, 8 Prisoner rehabilitation programs, 90–91, 94–95, 98, 108, 112 Private-equity firms, 69, 85, 91, 105, 107 Projection bias, 72–73 Property banking crises and, xiv, 69 banking mistakes involving, 75–80 behavioral biases and, 72–75 dangerous characteristics of, 70–72 fresh thinking, need for, xvii, 80 investors’ systematic errors in, 74–75 perception of as safe investment, 76, 80 Prosper, 181, 187, 195 Provisioning funds, 187 Put options, 9, 82 Quants, 19, 63, 113 QuickBooks, 218 Quote stuffing, 57 Raffray, André-François, 144 Railways, affect of on finance, 23–25 Randomized control trials (RCTs), 101 Raphoen, Christoffel, 15–16 Raphoen, Jan, 15–16 RateSetter, 181, 187, 196 RCTs (randomized control trials), 101 Ready for Zero, 210–211 Rectangularization, 125, 126 figure 2 Regulation NMS, 61 Reinhart, Carmen, 35 Reinsurance, 224 Relendex, 181 Rentes viagères, 20 Repurchase “repo” transactions, 15, 185 Research-backed obligations, 119 Reserve Primary Fund, 44 Retirement, funding for anchoring effect, 137–138 annuities, 139 auto-enrollment in pension schemes, 135 auto-escalation, 135–136 conventional funding, 127–128 decumulation, 138–139 government reaction to increased longevity, 128–129 home equity, 139–140 life expectancy, projections of, 124–127, 126 figure 2 life insurance policies, cash-surrender value of, 142 personal retirement savings, 128–129, 132–133 replacement rate, 125 reverse mortgage, 140–142 savings cues, experiment with, 137 SmartNest, 129–131 Reverse mortgages, 140–142 Risk-adjusted returns, 118 Risk appetite, 116 Risk assessment, 24, 45, 77–78, 208 Risk aversion, 116, 215 Risk-based capital, 77 Risk-based pricing model, 176 Risk management, 55, 117–118, 123, 195–197 Risk Management Solutions, 222 Risk sharing, 8, 82 Risk-transfer instrument, 226 Risk weights, 77–78 Rogoff, Kenneth, 35 “The Role of Government in Education” (Friedman), 165 Roman Empire business corporation in, 7 financial crisis in, 36 forerunners of banks in, 11 maritime insurance in, 8 Rotating Savings and Credit Associations (ROSCAs), 209–210 Roulette wheel, use of in experiment on anchoring, 138 Royal Bank of Scotland, 186 Rubio, Marco, 172 Russia, mortgage market in, 67 S-curve, in diffusion of innovations, 45 Salmon, Felix, 155 Samurai bonds, 27 Satsuma Rebellion (1877), 27 Sauter, George, 58 Save to Win, 214 Savings-and-loan crisis in US (1990s), 30 Savings cues, experiment with, 137 Scared Straight social program, 101 Scholes, Myron, 31, 123–124 Science, Technology, and Industry Scoreboard of OECD, 147 Securities and Exchange Commission (SEC), 54, 56, 57, 58, 64 Securities markets, 14 Securitization, xi, 20, 37–38, 117–122, 183–184, 196, 236 Seedrs, 160–161 Sellaband, 159 Shared equity, 80–84 Shared-equity mortgage, 84 Shepard, Chris, xii–xiii Shiller, Robert, xv–xvi, 242 Shleifer, Andrei, 42, 44 Short termism, 58 SIBs.


pages: 403 words: 119,206

Toward Rational Exuberance: The Evolution of the Modern Stock Market by B. Mark Smith

Alan Greenspan, bank run, banking crisis, book value, business climate, business cycle, buy and hold, capital asset pricing model, compound rate of return, computerized trading, Cornelius Vanderbilt, credit crunch, cuban missile crisis, discounted cash flows, diversified portfolio, Donald Trump, equity risk premium, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, full employment, Glass-Steagall Act, income inequality, index arbitrage, index fund, joint-stock company, junk bonds, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market clearing, merger arbitrage, Michael Milken, money market fund, Myron Scholes, Paul Samuelson, price stability, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, Robert Bork, Robert Shiller, Ronald Reagan, scientific management, shareholder value, short selling, stocks for the long run, the market place, transaction costs

Shortly before his death in 1976, he conceded, “I’m on the side of the efficient market school of thought.”13) The intellectual revolution on Wall Street did not end with the concept of market efficiency. Fischer Black, a tall, courtly MIT professor given to few words, soon dropped another bombshell. Working with his colleague Myron Scholes, Black resolved a problem that had been perplexing theorists for some time: how to value options. As they pertain to the stock market, options are contracts that enable the holder to purchase (or sell), at his discretion, a given stock at a given price (called the strike price) within a given amount of time.

As he pondered his brother’s remarks, Hayne wondered if it might be possible to devise a means by which worried investment managers could protect themselves against bear markets, without having to liquidate their entire portfolios. He was well aware of the landmark work done by Fischer Black and Myron Scholes, creator of the Black-Scholes model for valuing options. What was needed, Leland reasoned as he lay in bed, was a “put option” on the market as a whole that a portfolio manager could purchase to “insure” his holdings against a bear market. (A “put” option is the opposite of a “call” option; the holder of the “put” is entitled to sell a specified security at a specified price during a specified period of time.)

For example, a hedge fund such as LTCM would buy one bond and simultaneously sell another, similar bond short, betting that the relationship between the two was out of line and would eventually return to what it should be. When that occurred, the fund would be able to close out its position at a profit. LTCM was the proverbial mother of all hedge funds. It would be the biggest, with the brightest people employed to run it. Two Nobel laureates—Myron Scholes and Robert Merton, developers of the early options pricing theory—joined other Wall Street “stars” to manage the new entity. A minimum commitment of $10 million was required of anyone seeking to invest. There was no shortage of applicants. In essence, the strategy of LTCM was to seek out and exploit pricing inefficiencies in all financial markets throughout the world.


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, airline deregulation, Alan Greenspan, Albert Einstein, augmented reality, basic income, Bear Stearns, behavioural economics, Bernie Sanders, Black-Scholes formula, Blitzscaling, buy and hold, capital controls, Carl Icahn, computerized trading, Cornelius Vanderbilt, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deal flow, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Glass-Steagall Act, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Ida Tarbell, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, Mary Meeker, mass immigration, means of production, Metcalfe’s law, Michael Milken, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, Neal Stephenson, new economy, Norman Mailer, obamacare, PalmPilot, Paul Samuelson, Performance of Mutual Funds in the Period, Peter Thiel, price mechanism, principal–agent problem, profit maximization, proprietary trading, prudent man rule, public intellectual, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Snow Crash, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, TED Talk, The Nature of the Firm, the payments system, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

Once again, markets themselves, operating independently, were better at determining the proper prices of stocks and bonds than any supposed expert. And that meant that the customary operations of Wall Street firms were wrong and needed to change. As a graduate student, Jensen shared an office with another young economist, Myron Scholes. In 1968 Scholes got a job at MIT; Jensen urged him to get in touch with Fischer Black, a mathematician living in Boston whom he had encountered a few years earlier at a meeting in Chicago. Soon Black and Scholes were working together, taking on the problem of how to price options, which are bets on the future movement of a stock.

Back in 1978, in the introduction to a special issue of the Journal of Financial Economics devoted to his friend Eugene Fama’s efficient market hypothesis, Jensen wrote, “In the literature of finance, accounting, and the economics of uncertainty, the Efficient Market Hypothesis is accepted as a fact of life, and a scholar who purports to model behavior in a manner which violates it faces a difficult task of justification.” For Jensen to abandon this view was heresy to the minds of his old friends in financial economics. Jensen had stood as a groomsman at Myron Scholes’s wedding; now Scholes refused to speak to him. Solving the principal-agent problem had become a chimera: you’d eliminate what seemed to be its main cause, such as corporate managers who didn’t have to pay attention to the markets, and a few years later the problem would reappear in a different form—Wall Street analysts preoccupied with quarterly earnings.

Firms that didn’t want to be left behind were also investing in the possibility that the new financial economics, which almost nobody on Wall Street understood substantively, might wind up becoming another way of making a lot of money. Goldman Sachs, by now Morgan Stanley’s chief rival, had hired Fischer Black. Salomon hired Myron Scholes. Morgan Stanley didn’t hire any future Nobel Prize winners, but it did begin to hire economics Ph.D.s from MIT and Chicago—for that matter, Ph.D.s in physics and mathematics—and to invest heavily in the additional computer capability that this kind of work required. Derivatives—financial instruments derived from the price of something else, like stocks or bonds or commodities—had been around forever; they were essentially promises to buy or sell something in the future at a preestablished price, and therefore a way of betting that the price would rise or fall.


pages: 237 words: 50,758

Obliquity: Why Our Goals Are Best Achieved Indirectly by John Kay

Andrew Wiles, Asian financial crisis, Bear Stearns, behavioural economics, Berlin Wall, Boeing 747, bonus culture, British Empire, business process, Cass Sunstein, computer age, corporate raider, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, discovery of penicillin, diversification, Donald Trump, Fall of the Berlin Wall, financial innovation, Goodhart's law, Gordon Gekko, greed is good, invention of the telephone, invisible hand, Jane Jacobs, junk bonds, lateral thinking, Long Term Capital Management, long term incentive plan, Louis Pasteur, market fundamentalism, Myron Scholes, Nash equilibrium, pattern recognition, Paul Samuelson, purchasing power parity, RAND corporation, regulatory arbitrage, shareholder value, Simon Singh, Steve Jobs, Suez canal 1869, tacit knowledge, Thales of Miletus, The Death and Life of Great American Cities, The Predators' Ball, The Wealth of Nations by Adam Smith, ultimatum game, urban planning, value at risk

To fit the world into a single model or narrative fails to acknowledge the universality of uncertainty and complexity. The reputation of financial economics has never recovered from the blow of the virtual collapse of Long-Term Capital Management, a sophisticated practitioner of the risk models outlined in chapter twelve, and the involvement of two Nobel Prize winners, Robert C. Merton and Myron Scholes. The fund built huge positions on the basis of estimated mispricings, relying on its models to control its exposures. When the Asian financial crisis blew up in 1997, the fund managers extended their positions. They believed their own models. Their failure was a precursor of the much larger failures that would follow a decade or so later.

randomness Rawls, John Reed, John reengineering Reengineering the Corporation (Hammer and Champy) regulatory arbitrage religion Rembrandt van Rijn Renaissance retail sector Ricks, Christopher risk management RiskMetrics Rockefeller, John D. Roosevelt, Franklin D. root method Rotella, Bob Rousseau, Jean-Jacques rules Saint-Gobain salesmen Salomon Brothers Samuelson, Paul Santa Maria del Fiore cathedral Scholes, Myron science scorecard Scottish Enlightenment Sculley, John Sears securities selfish gene September 11 attacks (2001) shareholder value share options Sieff, Israel Sierra Leone Simon, Herbert simplification Singapore Singer Smith, Adam Smith, Ed Smith, Will SmithKline soccer (English football) social contract socialism social issues socialist realism sociopaths Solon Sony Sony Walkman Soros, George Soviet Union sports Stalin, Joseph “Still Muddling, Not Yet Through” (Lindblom) Stockdale, James Stockdale Paradox stock prices Stone, Oliver successive limited comparison sudoku Sugar, Alan Sunbeam Sunstein, Cass Super Cub motorcycles superstition surgery survival sustainability Taleb, Nassim Nicholas Tankel, Stanley target goals teaching quality assessment technology see also computers teleological fallacy telephones Tellus tennis Tetlock, Philip Tet Offensive (1968) Thales of Miletus Thornton, Charles Bates “Tex” tic-tac-toe Tolstoy, Leo transnational corporations transportation Travelers Treasury, U.S.


Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

Some market professionals estimate that 85 percent of individual investors who play the options market lose money. Not only do options buyers have to be right about 13 The original article was published in 1973: Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, vol. 81, no. 3, pp. 637–654. Fischer Black was deceased when the Nobel Prize was awarded in 1997. Myron Scholes shared the Nobel Prize with William Sharpe and Bob Merton, the latter contributing to the discovery of the formula. CHAPTER 15 The Rise of Exchange-Traded Funds, Stock Index Futures, and Options 267 the direction of the market but also their timing must be nearly perfect, and their selection of the strike price must be appropriate.

In contrast, in volatile markets, the premiums on puts and calls are bid up as traders consider it more likely that the options will have value by the time of their expiration.12 The price of options depends on the judgments of traders as to the likelihood that the market will move sufficiently to make the rights to buy or sell stock at a fixed price valuable. But the theory of options pricing was given a big boost in the 1970s when two academic economists, Fischer Black and Myron Scholes, developed the first mathematical for12 Chapter 16 will discuss a valuable index of option volatility called VIX. 266 PART 4 Stock Fluctuations in the Short Run mula to price options. The Black-Scholes formula was an instant success. It gave traders a benchmark for valuation where previously they used only their intuition.

It gave traders a benchmark for valuation where previously they used only their intuition. The formula was programmed on traders’ handheld calculators and PCs around the world. Although there are conditions when the formula must be modified, empirical research has shown that the Black-Scholes formula closely approximates the price of traded options. Myron Scholes won the Nobel Prize in Economics in 1997 for his discovery.13 Buying Index Options Options are actually more basic instruments than futures or ETFs. You can replicate any future or ETF with options, but the reverse is not true. Options offer the investor far more strategies than futures. Such strategies can range from the very speculative to the extremely conservative.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

But the theory of options pricing was given a big boost in the 1970s when two academic economists, Fischer Black and Myron Scholes, developed the first mathematical formula to price options. The Black-Scholes formula was an instant success. It gave traders a benchmark for valuation where previously they used only their intuition. The formula was programmed on traders’ handheld calculators and PCs around the world. Although there are conditions when the formula must be modified, empirical research has shown that the Black-Scholes formula closely approximates the price of traded options. Myron Scholes won the Nobel Prize in Economics in 1997 for his discovery.10 Buying Index Options Options are actually more basic instruments than futures or ETFs.

Options based on the S&P 500 Index are more widely used by institutional investors. 9. Chapter 19 will discuss the VIX, a valuable index of option volatility. 10. The original article was published in 1973: Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, vol. 81, no. 3, pp. 637-654. Fischer Black was deceased when the Nobel Prize was awarded in 1997. Myron Scholes shared the Nobel Prize with William Sharpe and Bob Merton, the latter contributing to the discovery of the formula. Chapter 19 1. This is based on a $55 trillion worldwide total stock value at the end of 2012. 2.

., 108 sector rotation in, 120–126 on September 11, 2001, 241–243 September effect and, 330–331 small-cap stock return and, 177–178, 182 survivor firms in, 128 top-performing firms in, 126–130 value-weighted, 110–111 Safe-haven status, 51–52 Salomon Brothers, 13–14 Samsung, 205 Samuelson, Paul on business cycles, 229–230, 234 on purchasing power, 93 SAP, 205 Saturday Night Massacre, 217 Savings rates, 66 Savings vehicles, 140 Scholes, Myron, 285–286 Schwert, William, 75 Seasonal anomalies. See also Calendar anomalies, 326 SEC (Securities and Exchange Commission), 52, 297, 299 Sector allocation, 203–205 Sector rotation, 120–126 Securities and Exchange Act, 52 Securities and Exchange Commission (SEC), 52, 297, 299 Securities Investor Protection Corporation, 54 Security Analysis Buffett on, 363 on gambling fever, 3 on price/earnings ratios, 183–184 value-oriented approach of, 11, 176 Sell programs, 279 Selling index options, 286–287 September 11, 2001, 241–243, 254–255 September effect, 330–334 Sequoia Fund, 361 Settlement dates, 276–277, 280 SFAS (Statement of Financial Account Standard), 152 Shareholder value buybacks in, 144–145 conclusions about, 155–156 discount dividends, 149 discounted cash flows in, 143–144 dividends, historically, 144–145 earnings, concepts of, 149–155 earnings growth, historically, 145–149 earnings in, generally, 144–145 earnings, not discounted, 149 earnings, operating, 152–154 earnings, quarterly reports on, 154–155 earnings, reporting methods for, 150–152 Gordon dividend growth model on, 147–149 introduction to, 143 NIPA profits in, 152–154 stock valuation of, 147–149 Sharpe, William, 175, 361 Shell Oil, 123–124 Shiller, Robert on overvaluation of market, 14 on real estate bubble, 29 on stock market valuation, 162 on stock price variability, 307 Short-term investing bonds in, 78, 85 holding periods in, 94–95, 289–291 inflation and, 222–226 long run vs.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, behavioural economics, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial engineering, financial innovation, fixed income, frictionless, frictionless market, Future Shock, George Akerlof, global macro, implied volatility, index arbitrage, intangible asset, Jeff Bezos, Jim Simons, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, loose coupling, managed futures, margin call, market bubble, market design, Mary Meeker, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Solow, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, UUNET, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

Thus the portfolio is hedged when it needs it and is free to take market exposure when there is a buffer between its value and the floor value. Because the hedge increases and decreases over time, it is called a dynamic hedge. The hedging method of portfolio insurance is based on the theoretical work of Fischer Black, Robert Merton, and Myron Scholes. Their work is encapsulated in the Black-Scholes formula, which makes it possible to set a price on an option. No other formula in economics has had as much impact on the world of finance. Merton and Scholes both received the Nobel Prize for it. (Fischer Black had died a few years before the award was made.)

LTCM TAKES UBS TO THE CLEANERS With the UBS traders so active in generating huge losses, it was only a matter of time before the senior management of UBS took up the sport, this time under the tutelage of none other than LTCM, which offered to provide the company with insight into its trading and risk management practices. 118 ccc_demon_097-124_ch06.qxd 7/13/07 2:43 PM Page 119 LT C M R I D E S THE LEVERAGE CYCLE TO HELL The partners in LTCM not only ran a highly levered fund for their investors; they doubled up on that leverage by borrowing money themselves to put into the fund. Hilibrand borrowed $24 million from Credit Lyonnais; Hans Hufschmid, formerly the head of foreign exchange trading at Salomon and a more recent addition to the LTCM partnership, personally borrowed $14 million, and a few others with either less wherewithal or more prudence borrowed less. Myron Scholes, a Nobel laureate and latecomer into the LTCM hedge fund partnership, championed another approach to pile leverage onto their positions: a warrant that would pay off as the fund increased while limiting the partners’ liability if the fund value dropped. They shopped the warrant to Merrill Lynch and to Chase, and both firms demurred.

The problem of increasing market risk in the face of reduced economic risk, and its implications for greater endogenous risk in the financial markets, is presented in detail in Horace W. Brock, “The Transformation of Risk: Main Street versus Wall Street,” May 2002 Profile Report, Strategic Economic Decisions, Inc. CHAPTER 2 The Demons of ’87 1. Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (May/June 1973). Robert C. Merton, “Theory of Rational Option Pricing,” Bell Journal of Economics and Management Science 4 (Spring 1973); reprinted as Chapter 8 in his book, Continuous-Time Finance (Malden, MA: Blackwell Publishing, 1992).


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

Butter and eggs would soon be left behind. This was the beginning of the development of markets in derivative securities. It is not a coincidence that the University of Chicago was then and is today a leading centre of the study of financial economics. In the following year two members of its faculty – Fischer Black and Myron Scholes – would publish a seminal paper on the valuation of derivatives.5 Much of the growth of the financial sector in the three decades that followed would be the direct and indirect consequence of the growth of derivative markets. Futures were not the only kind of derivative. An option gave you the right, but not the obligation, to buy or sell – you could use an option to insure yourself against a rise, or a fall, in price.

The key components of academic financial theory, however, are the ‘efficient market hypothesis’ (EMH), for which Eugene Fama won the Nobel Prize in 2013, and the Capital Asset Pricing Model (CAPM), for which William Sharpe won the Nobel Prize in 1990. Sharpe shared that prize with Markowitz, and Myron Scholes received a Nobel Prize in 1997, just before the famous blow-up of Long-Term Capital Management, in which Scholes was a partner; Black had died in 1995. All of these financial economists have affiliations to the University of Chicago. EMH asserts that all available information about securities is ‘in the price’.

Arbitrage involves taking matched positions – buying one security, selling another, when the price differential moves outside its normal range. Such arbitrage strategies were widely used by Long-Term Capital Management, the hedge fund that collapsed spectacularly in 1998. LTCM, best known for its association with the two Nobel Prize-winning economists Robert Merton and Myron Scholes, was founded by John Meriwether, who had headed the trading operations of Salomon Bros in the 1980s (those described by Michael Lewis in his book Liar’s Poker) which pioneered the explosive growth of FICC trading. The fund was largely staffed by his former colleagues, and insiders often described it as ‘Salomon North’.


Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

Alan Greenspan, Albert Einstein, Alvin Toffler, behavioural economics, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, disinformation, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, global macro, Jim Simons, Lao Tzu, Long Term Capital Management, managed futures, market bubble, market microstructure, Market Wizards by Jack D. Schwager, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Sharpe ratio, systematic trading, the scientific method, three-martini lunch, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

The premise of their hypothesis was that stock prices were always right so you could not divine the market’s future direction. It assumed that everyone was rational.2 Miller and Fama believed that perfectly rational people would never pay more or less for a financial instrument than it was actually worth. A colleague, and fervent supporter of the Efficient-Markets Hypothesis, Myron Scholes was also certain that markets could not make mistakes. He and his associate, Robert Merton, saw the finance universe as tidy and predictable. They assumed that the price of IBM would never go directly from 80 to 60 but would always stop at 79 3/4, 79 1/2, and 79 1/4 along the way.3 LTCM’s founders believed the market was a perfect normal distribution with no outliers, no fat tails, and no unexpected events.

See also trend following manipulation of monetary policy, 181-183 Marcus, Michael, 15 Longstreet, Roy, 239 market crashes, trend following during, 97-98 losers and winners market gurus, 147-148 crowd mentality, 117-120 during market crashes, 97-98 Efficient-Markets Hypothesis, 101-102 market predictors, 165-167 contradictions in predictions, 175-178 trend following versus, 194 hatred of trend following, 109-110 market price, importance of, 51-52 unexpected events, 91 market theories zero-sum game, 95 losses avoiding averaging, 79 271 fundamental analysis, 33-35 technical analysis, 35-36 markets drawdowns, 69-70 change in, 45 exit strategies, 75-76 entering, 73 what to trade, 65-67 272 Index McCain, John, 182 media, market predictions by, 177 Merton, Robert, 101 Miller, Merton, 101 origins of trend following, 221-231 Ostgaard, Stig, 221 P Paulson, John, 109 misleading information, spreading, 169-170 Pelley, Scott, 175 monetary policy, government manipulation of, 181-183 performance statistics for trend following, 15-23 money, capitalism and, 113-115 Picasso, Pablo, 88 money management, importance of, 61-62 players, types of, 205 morality of trend following, 109-110 Popoff, Peter, 166 pliability, 30 moving average, defined, 13 portfolio diversity, example of, 65-67 Mulvaney, Paul, 22 position sizing, 61-62 Munger, Charlie, 157 Prechter, Robert, 225 N–O predictions about market, 165-167 Nasdaq market crash (1973-1974), 151 net worth of trend following traders, 15 New Blueprints for Gains in Stocks and Grains (Dunnigan), 230 avoiding, 47-48 contradictions in, 175-178 trend following versus, 194 predictive technical analysis, 35 Nicklaus, Jack, 120 presidents, approval ratings based on economy, 181-182 Nikkei 225 stock index, 151 price action Obama, Barack, 182 optimism in trend following, 201-202 entering markets, 73 importance of, 51-52 profit targets, avoiding, 75-76 Index Profits in the Stock Market (Gartley), 226 Prospect Theory, 118 prudence, 30 Pujols, Albert, 138-139 Q–R quants, defined, 12 quarterly performance reports, 105-106 273 S S&P 500, defined, 13 Sack, Brian, 183 Schabacker, Richard W., 226 Schmidt, Eric, 47 Scholes, Myron, 101 scientific method in trend following, 134-135 Seidler, Howard, 20 Ramsey, Dave, 91 Seinfeld (television program), 161 Rand, Ayn, 113 selecting trading systems, 59-62 reactive technical analysis, 36 self-regulation, 124 “Reminiscences of a Stock Operator” (Lefèvre), 223 self-reliance, 30 repeatable alpha, defined, 12 Seykota, Ed, 15, 62 Rhea, Robert, 225 Shanks, Tom, 21 Ricardo, David, 223 Sharpe ratio, 137 risk assessment, 55-56 sheep mentality, 117-120 risk management, 61-62 short, defined, 12 Robbins, Anthony, 208 Simons, Jim, 135 Robertson, Pat, 166 The Simpsons (television program), 110 robustness of trend following, 85 Rogers, Jim, 23 Roosevelt, Franklin D., 114 Rosenberg, Michael, 201 rules of trend following, 201-202 Serling, Rod, 26 skill versus luck in trend following, 189-190 Smith, Vernon, 26 Social Security, 181 Sokol, David, 158 Soros, George, 189 274 Index speculation qualities of, 30 role of, 29-30 Speilberg, Steven, 208 spreading misleading information, 169-170 statistics in trend following, 137-140 Stone, Oliver, 29 story, fundamental analysis as, 33-35 Studies in Tape Reading (Wyckoff), 226 sunk costs, 118 Sunrise Capital, 5 drawdowns statistics, 70 performance statistics, 22 Technical Traders Guide to Computer Analysis of the Futures Markets (Lebeau), 60 Ten Years in Wall Street (Fowler), 224 three-phase systems, 60 Trader (documentary), 143 traders, investors versus, 29-30 trading gold, 173 trading systems, selecting, 59-62 “Trading With the Trend” (Dunnigan), 229 Transtrend, 5, 15 Trend Commandments (Covel) content of, 6 people written for, 9 trend following Swensen, David, 187 advantages of, 235-236 systematic global macro, defined, 12 compared to black box, 187 systematic trend following.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

He became quite fluent in finance as a result of this experience, and soon Bachelier found himself back in academia working under the polymath Henri Poincaré.1 He defended the first portion of his thesis, entitled “Theory of Speculation,” in March 1900. In it, he showed how to value complicated French derivatives using advanced mathematics. In fact, his approach bore some similarity to that of Fischer Black and Myron Scholes many years later. Bachelier’s work was the first use of formal models of randomness to describe and evaluate markets. In his paper, Bachelier used a form of what is called Brownian motion.2 Brownian motion was named after Robert Brown, who studied the random motions of pollen in water. Albert Einstein would describe this same phenomenon in one of his famous 1905 papers.

He also redefined Bachelier’s equations to have the returns in lieu of the actual stock prices move in accordance with a slightly different form of Brownian motion because Bachelier’s form of Brownian motion implied that a stock could potentially have a negative price, which is not sensible, as the concept of limited liability for shareholders implies that the floor of value is zero.17 The Emergence of Investment Theory 235 Samuelson helped motivate the work on derivatives pricing with a 1965 paper on warrants and a 1969 paper with Robert Merton on the same subject—although he did, as he would later note, miss one crucial assumption that Black and Scholes were able to make in their formulation of options prices.18 Samuelson can be considered an intermediary in calling attention to the subfield of derivatives pricing, even if the cornerstone of the most famous final theory was not his own. Black-Scholes Options Pricing Formula Myron Scholes spent his graduate years at the University of Chicago, where he studied alongside Merton Miller and Eugene Fama. He went on to teach at the MIT Sloan School of Management, and during his time there he met his future collaborator in the theory of derivatives, Fischer Black. Black was a graduate of Harvard, where he had spent both his undergraduate and graduate years studying applied mathematics, and was working for Arthur D.

Samuelson, “Rational Theory of Warrant Pricing,” Industrial Management Review 6, no. 2 (Spring 1965): 13–39; Paul A. Samuelson and Robert C. Merton, “A Complete Model of Warrant Pricing That Maximizes Utility,” Industrial Management Review 10, no. 2 (Winter 1969): 17–46. 7. The Emergence of Investment Theory 371 19. Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (May–June 1973): 637–654. 20. A. James Boness, “Elements of a Theory of Stock-Option Value,” Journal of Political Economy 72, no. 2 (April 1964): 163–175. 21. Marion A. Brach, Real Options in Practice (Hoboken, NJ: Wiley, 2003), 24. 22.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, bank run, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, deal flow, Deng Xiaoping, diversification, diversified portfolio, Dr. Strangelove, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, Great Leap Forward, guns versus butter model, high net worth, income inequality, interest rate derivative, it's over 9,000, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, power law, price mechanism, price stability, private sector deleveraging, proprietary trading, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, short squeeze, sovereign wealth fund, special drawing rights, special economic zone, subprime mortgage crisis, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, vertical integration, War on Poverty, Washington Consensus, zero-sum game

From the faculties of Yale, MIT and the University of Chicago came a torrent of carefully reasoned academic papers by future Nobel Prize winners such as Harry Markowitz, Merton Miller, William Sharpe and James Tobin. Their papers, published in the 1950s and 1960s, argued that investors cannot beat the market on a consistent basis and that a diversified portfolio that broadly tracks the market will produce the best results over time. A decade later, a younger generation of academics, including Myron Scholes, Robert C. Merton (son of famed sociologist Robert K. Merton) and Fischer Black, came forward with new theories on the pricing of options, opening the door to the explosive growth of financial futures and other derivatives contracts ever since. The work of these and other scholars, accumulated over fifty years and continuing today, constitutes the branch of economic science known as financial economics.

They were kind to include me in their efforts. I owe an enormous debt incurred over many years to my legal mentors Tom Puccio, Phil Harris, Mel Immergut, Mary Whalen and Ivan Schlager. Even lawyers need lawyers and they are the best. Thank you to my economics mentors, John Makin, Greg “the Hawk” Hawkins, David Mullins, Jr., Myron Scholes and Bob Barbera. Given my heterodox theoretic approach to their field, I thank them for listening and sharing their thoughts and views. Thanks also to my market mentors, Ted Knetzger, Bill Rainer, John Meriwether, Jim McEntee, Gordon Eberts, Chris Whalen, Peter Moran and Dave “Davos” Nolan. Davos and I shorted Fannie Mae stock at $45 per share in 2005 and lost money when it went to $65.

phase transitions, in complex system Plaza Accord, 1985 Poland Pompidou, Georges Portugal price-gold-flow mechanism price-specie-flow mechanism primary dealers private enterprise prospect theory protectionism Putin, Vladimir quantitative easing (QE) Ray, Chris Reagan, Ronald real estate bubble of 2002 to 2007 recessions, U.S. 1970s to 1980s of 2001 of 2007 See also Panic of 2008 regional currency blocs Reichsbank reichsmark rent seeking rentenmark reserve currencies risk, in complex systems risk aversion Road, The (McCarthy) Rockefeller, John D., Jr. Romer, Christina D. Roosevelt, Franklin D. Rothkopf, David Rousseff, Dilma Rubin, Robert Russia Samuels, Nathaniel Samuelson, Paul San Francisco earthquake, 1906 Sarkozy, Nicolas Schacht, Hjalmar Schiff, Jacob H. Scholes, Myron Schumer, Charles E. Schwartz, Alan Second Bank of the United States September 11, 2001, terrorist attacks of Shakespeare, William Sharpe, William Shultz, George P. Slovic, Paul Smith, Adam Smithsonian Agreement social media social psychology, on economics Soros, George South Korea sovereign debt crisis of 2010, European sovereign wealth funds (SWFs) Spain special drawing rights (SDRs) stagflation state capitalism sterling crisis of 1992 devaluations and gold exchange standard Stiglitz, Joseph stimulus, Keynesian stimulus programs, Obama’s stock market crash critical state system of a of October 19, 1987 Strategic and Economic Dialogue (S&ED) Strategic Command, U.S.


pages: 318 words: 99,524

Why Aren't They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis by Kevin Rodgers

Alan Greenspan, algorithmic trading, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black-Scholes formula, buy and hold, buy low sell high, call centre, capital asset pricing model, collapse of Lehman Brothers, Credit Default Swap, currency peg, currency risk, diversification, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, fixed income, Flash crash, Francis Fukuyama: the end of history, Glass-Steagall Act, Hyman Minsky, implied volatility, index fund, interest rate derivative, interest rate swap, invisible hand, John Meriwether, latency arbitrage, law of one price, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, Minsky moment, money market fund, Myron Scholes, Northern Rock, Panopticon Jeremy Bentham, Ponzi scheme, prisoner's dilemma, proprietary trading, quantitative easing, race to the bottom, risk tolerance, risk-adjusted returns, Silicon Valley, systems thinking, technology bubble, The Myth of the Rational Market, The Wisdom of Crowds, Tobin tax, too big to fail, value at risk, vertical integration, Y2K, zero-coupon bond, zero-sum game

Last, the time until the option’s maturity must also be important; the right to buy the share at £110 in a year should be worth more than the right to do so tomorrow – once again the chance of a big ‘win’ is higher the longer the wait. All this was clear, but there was no pricing formula. That is, no formula until 1973, when two economists at MIT, Fischer Black and Myron Scholes, aided by their colleague Robert C. Merton, solved the centuries-old problem.2 Their argument was brilliantly elegant – the way to manufacture the option was to hold a blend of shares and borrowed money and to rebalance the proportions as the share price moved. So instead of the ‘static’ way we saw of making a linear share forward (i.e. borrow money, buy a share and sit tight), this was ‘dynamic’ – the balance of shares and borrowing would be altered continuously every time a tiny movement in price occurred.

ReleaseID=901193 15 ‘Alpari UK currency broker folds over Swiss franc turmoil’, BBC News, 16 January 2015, http://www.bbc.co.uk/news/business-30846543 Chapter 4 1 ‘Causes of the Recent Financial and Economic Crisis’, Testimony of Chairman Ben S. Bernanke before the Financial Crisis Inquiry Commission, Washington, D.C., 2 September 2010, http://www.federalreserve.gov/newsevents/testimony/bernanke20100902a.htm 2 ‘The Pricing of Options and Corporate Liabilities’, Fischer Black and Myron Scholes, Journal of Political Economy, May–June 1973, https://www.cs.princeton.edu/courses/archive/fall02/cs323/links/blackscholes.pdf 3 US Treasury data, http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx 4 ‘Procter & Gamble’s Tale of Derivatives Woe’, NY Times, 14 April 1994, http://www.nytimes.com/1994/04/14/business/worldbusiness/14iht-procter.html 5 ‘The Bankers Trust Tapes’, Business Week, 16 October 1995, http://www.bloomberg.com/news/articles/1995-10-15/the-bankers-trust-tapes 6 ‘The Progress of Computing’, Willam D.

(Frankie Valli and the Four Seasons), 3–5, 9 oil, 139, 148, 149–50, 220 Oktoberfest, 144–5 one-stop shop, 145, 160, 168, 230 online banking, 233–4 OPTICS, 101, 103, 131, 153, 170 option-based recapitalisation charge (OBRC), 217–18 options, 10, 13, 20, 23, 27, 33–4, 38, 43–7, 49, 77, 91–114, 121, 128, 134, 137, 140, 141, 149, 150, 218, 222–3 Asian options, 106 barrier products, 104, 107, 108 carry trade, 108–10 commoditisation, 110–11 delta hedging, 97 double knockouts, 107 exotics, 105–11, 127 foreign exchange, 10, 13, 20, 23, 27, 33–4, 38, 43–7, 49, 77, 95–114, 222–3 gamma, 97–8, 100 Greeks, 98, 99, 101, 105, 107, 110, 111, 112, 114, 127, 129, 150, 157, 158, 182, 219 lattice methods, 112 lookbacks, 107 over-the-counter (OTC) market, 96, 209 power options, 107 pricing of, 91–5, 107, 111–14, 128, 133, 150 range trades, 107, 108 rho, 98 risk-weighted assets (RWA), 124–31, 134, 166, 211 spoofing, 99, 192–3 strike price, 94, 95, 104, 113, 218 theta, 98, 140 time decay, 98 tree approach, 112–14 vega, 98 volatility, 94, 98, 128–9 Organisation for Economic Co-operation and Development (OECD), 124–5, 139, 207 over-the-counter (OTC) market, 96, 209 P Panopticon, 199 Patton, George Smith, 84 pay, 43, 161–3, 210, 216 PayPal, 233 peer-to-peer, 234 pension funds, 9, 61, 76, 96 Philippines, 137 ‘pipes’, 71, 72 ‘pips’, 13, 18, 41, 65, 73, 77 Piranha, 48 Pittsburgh, Pennsylvania, 209 Plankton Strategy, 38, 40, 55, 58 Poland, 117, 167 Ponzi schemes, 205–6 Portugal, 173 power options, 107 Prebon Yamane, 28 Precision Pricing, 65 prime brokerage (PB), 61–3, 66, 120, 209 principal model, 7–8 principles-based regulation (PBR), 201–2 Prisoners’ Dilemma, 84, 186, 197, 201 Procter and Gamble, 109, 136, 155 production credits, 49, 50 proprietary trading, 22, 31, 39, 46–7, 125 Prosper, 234 Pushkin, Alexander, 30 Q quadratic equations, 105–6 quantitative analysis, xiv, 100–1, 103–8, 110–14, 126, 150, 158 quantitative easing, 82 R Rand, Ayn, 202 range trades, 107 ratings agencies, 155–8, 208, 219 rational markets, 202–6 recapitalisation, 217 recovery value, 151, 157, 160 regulation, 73, 80, 131, 148, 152, 168, 174, 180, 186–7, 191–6, 198–9, 200–18, 229, 231, 232 BaFin, 200, 202 bank tax, 216 Basel Accords, 124, 125, 130, 166, 207–9, 211, 217, 231 Big Bang (1986), 201 Central Counterparties (CCPs), 209, 213–15, 229 Commodity Futures Trading Commission (CFTC), 202 computers, 209, 213 ‘cops on the beat’, 215 Dodd–Frank Act (2010), 209, 230 European Banking Authority (EBA), 211–12 Financial Services (Banking Reform) Act (2013), 210 Financial Stability Board (FSB), 212, 214, 216 Glass–Steagall Act (1933), 168, 201, 230 Gramm–Leach–Bliley Act (1999), 168, 201 option-based recapitalisation charge (OBRC), 217–18 principles-based regulation (PBR), 201–2 rational markets, 6, 202–6 Riegle–Neal Act (1994), 168 shadow banking, 214–15 surveillance, 110, 190, 195–9 trade repositories, 209–10 relative value trades, 72–3 repo markets, 171 request for quote (RFQ), 50, 51 retail banking, 169, 229–30, 233 retail FX, retail aggregators, 21, 61, 66, 74, 75, 79, 82–3 Reuters, 9, 22–3, 188 Reuters Dealing machines, 23, 25–8, 31, 32, 50, 59, 73 Revolutionary Application Program Interface Development (RAPID), 56–9, 77, 101 rho, 98 Riegle–Neal Act (1994), 168 risk, risk management, 15, 16, 19, 20–1, 24, 29, 31, 38–9, 40, 44–5, 53–5, 56–9, 64, 67, 70–1, 72, 73, 76, 77, 79, 99, 101–8, 110–14, 121–31, 135–6, 139, 142, 144, 150, 152, 157–63, 166– 7, 169–70, 172, 174, 200–1, 206–7, 209, 213, 219, 221, 224–7, 233 agency-like approach, 119, 127 Automated Risk Manager (ARM), 53–5, 56–9, 64, 67, 70–1, 72, 73, 76, 79, 101, 129, 169 BTAnalytics, 107, 108, 112, 134, 150 collateralised debt obligations (CDOs), 154, 156, 158–63 complex risk, 159 concentration, 213 counterparty credit risk, 141–2, 172, 201, 202–3, 209 credit default swaps (CDSs), 151–3, 157, 158, 164, 225 credit risk, 7, 8, 62–3, 123, 125–6, 130, 141, 151, 209 DBAnalytics, 150, 153 foreign exchange, 15, 16, 19, 20–1, 24, 29, 31, 38, 39, 40, 44–5, 49, 51, 53, 62, 77, 192 market risk, 7, 62, 123, 126, 130, 167 model dopes, 221–2 OPTICS, 101, 103, 131, 153, 170 perception gap, 220, 224 quantitative analysis, xiv, 100–1, 103–8, 110–14, 126, 150, 158 Revolutionary Application Program Interface Development (RAPID), 56–9, 77, 101 risk-adjusted return on capital (RAROC), 126–7, 131, 144, 219 risk-weighted assets (RWA), 124–31, 134, 166, 208, 211 shares, 92 Spreadsheet Solutions Framework (SSF), 111, 121, 138, 153 value at risk (VaR), 127–31, 135–6, 139, 142, 157, 158, 169, 170, 172, 174, 204, 207, 219, 226, 227 RiskMetrics, 131 rogue systems, 79–80 Rolling Stones, 87, 89, 151, 171, 172 Royal Bank of Scotland (RBS), 48, 217, 233 ‘Rule 575 – Disruptive Practices Prohibited’, 193 Russia, 30, 33, 38, 76, 114–32, 137–42, 146, 148, 150, 151, 152, 163, 172, 175, 199, 202, 204, 207, 221, 224, 228 Financial Crisis (1998), xi–xii, 29, 114, 115–16, 118–22, 124, 137–43, 146, 163, 172, 175, 202, 207, 221, 224, 228 rouble, 115–16, 118–22, 131, 137, 138, 139 rouble-denominated bonds (GKOs), 118–32, 134, 138–43, 149, 152, 158, 159, 173 S sales-traders, 50, 78 salespeople, 8–9, 11, 13–15, 20, 24, 28, 29, 33, 35, 37, 46, 47–52, 68, 96, 120 Salomon Brothers, 122, 133–4 Sanford, Charlie, 35, 126 Sarao, Navinder Singh, 193 Scholes, Myron, 94–5, 97 screen scraping, 32–3, 50, 59 Securities and Exchange Commission, 215 securities, 91, 145, 155 September 11 attacks (2001), 52, 146, 147 settlements, 5, 24, 40, 44, 51, 61, 101, 209 shadow banking, 214–15 shareholders, 25, 35, 47, 73, 84, 90, 124, 169, 172, 205 shares, 50, 60, 91, 113, 128, 212, 217 forward trades, 91–4, 133, 152 recapitalisation, 217 tree approach, 113 volatility, 94, 128–9 short-dated deposits, 8 Silicon Valley, 234 Singapore, 37, 137, 211 skewed prices, 18, 19, 73, 96, 98 slippage, 188–9 smartphones, 233 Soros, George, 24 South Africa, xvi Soviet Union (1922–91), 22, 64, 199, 204 Spain 87–9, 151, 159, 171, 172 ‘special purpose vehicle’, 154 spoofing, 99, 192–3 spot, 3–28, 33–4, 42–4, 46, 48–55, 67, 76, 77, 91, 96, 97, 98–9, 108, 111, 118, 122, 159, 165, 169, 188, 189, 199, 201, 222 automation, 23–8, 31–3, 42, 48–55, 56–84, 111, 199, 201 brokers, 3–28, 33, 43, 63, 192 traders, 3–31, 33, 35, 38, 41, 43, 46, 50, 52–4, 67–8, 73, 76, 78, 96, 99, 122, 189 voice traders, 54, 67, 76, 122 spread, 12, 14–15, 16, 18, 19, 31, 41–2, 44, 45, 53, 55, 61, 64, 68, 69, 75, 80, 96, 225 spread crossing, 18, 19 Spreadsheet Solutions Framework (SSF), 111, 121, 138, 153 spreadsheets, 33, 38, 40, 107, 111, 219 Standard and Poor’s (S&P), 155, 157, 160 Stanford University, 211 stocks, 50, 60, 79, 89, 117, 129, 133, 136, 138, 147–8, 203–4 indexes, 147–8 streamlining, 230–2 Stress VaR, 207, 211 strike price, 94, 95, 104, 113, 218 structured products, 44 structuring, 153, 219 student loans, 155, 231 sub-prime mortgages, 74, 88–90, 159–61, 170–2, 207, 227 suits, 132, 140–1, 149 surveillance, 110, 190, 195–9 swaps, 8, 92, 119–20, 121, 125, 126, 132, 134, 136, 141, 148, 149, 152, 173 Sweden, 148, 167 SWIFT, 23 Switzerland, 10, 81–3, 120, 211 franc, 9, 20, 31, 81–3 Swiss National Bank, 81–3 T Telerate, 9 ‘ten sigma event’, 135 Thailand, 135, 136, 139 theta, 98 ‘Things Can Only Get Better’ (D:Ream), 120, 121 time decay, 98 Tobin Tax, 216 Tokyo, Japan, 72 Tolstoy, Leo, 30 ‘too big to fail’, 90, 217 total return swaps (TRSs), 119–20, 136, 152 tracker funds, 147–8 trade repositories, 209–10 tranches, 154–9, 161, 174, 208 transparency, 141, 143, 151, 170, 212, 219 ‘tree approach’, 112–14 ‘trial by meeting’, 45, 52 triangle arbitrage, 31–2, 42, 54, 91, 122 Triangle Man, 31–2, 42, 54, 91, 122 Triple I High Risk Opportunities Fund, 116, 141 Troubled Asset Relief Program (TARP), 174, 175 Truth and Reconciliation, xvi Turkey, 231 Tuscany, Italy, 78, 115–16, 141 two-way pricing, 11–21, 23, 99 U UBS, 48, 52, 55, 59, 65, 68, 167, 197, 227 Ulster Bank, 233 United Kingdom, 22, 48, 89, 117, 120, 145, 163, 190, 200, 201–2, 203, 210, 233–4 Big Bang (1986), 201 Exchange Rate Mechanism Crisis (1992), xi, 22, 102–3 Financial Services Act (2013), 210 Flash Crash (2010), 79–80, 193 FX-fixing scandal (2013), 190 general election (1997), 120 LIBOR scandal (2012), 181–7, 188, 189, 190, 197, 198 London, England, vii–x, xi, 3, 9, 15, 35, 69, 72, 76, 79, 91, 120, 121, 137, 140, 193, 199, 202, 209 Northern Rock crisis (2007), 89, 163 pound, 9, 13, 28, 53, 184 principles-based regulation (PBR), 201–2 RBS recapitalisation (2008), 217 RBS/Ulster Bank system failure (2012), 233 Vickers Report (2013), 211, 230 United States, vii, xi, 9, 52, 56, 64, 69, 72, 74, 88–90, 108, 120, 143, 159–60, 168, 170–2, 196, 200, 203–6, 207, 209, 210, 212 Black Monday (1987), 108, 138, 204, 207 Comprehensive Capital Analysis and Review (CCAR), 212 Congress, 202, 205 Dodd–Frank Act (2010), 209, 230 dollar, 9, 12, 14, 17–18, 23, 28, 31, 53, 69, 71–2, 73, 79, 88, 96, 97, 99, 100, 104, 118, 119, 135, 136, 140, 184–6, 189 Federal Reserve, xii, 90, 109, 143, 187, 202–6, 212 Flash Crash (2010), 79–80, 193 Glass–Steagall Act (1933), 168, 201, 230 Gramm–Leach–Bliley Act (1999), 168, 201 Lehman Brothers bankruptcy (2008), 75, 89, 172–4, 179, 180, 217, 226, 230, 232 New York, 9, 35, 71, 72, 79, 88, 109, 169, 202 Riegle–Neal Act (1994), 168 September 11 attacks (2001), 52, 146, 147 Subprime Crisis (2007), 74, 88–90, 160–1, 170–2, 207, 227 Treasury bills, 119, 129, 133, 147 Vietnam War (1955–75), 181 Wall Street Crash (1929), 168 universal banking model, 230 V Valli, Frankie, 3–5, 9 value at risk (VaR), 127–31, 135–6, 139, 142, 157, 158, 169, 170, 172, 174, 204, 207, 219, 226, 227 Stress VaR, 207, 211 variation margin, 120, 141 vega, 98 Vickers Report (2013), 211, 230 voice traders, 54, 67, 76, 122 volatility, 14, 26, 46–7, 74–5, 80, 94, 98, 128–9, 137 Volker, Paul, 230 W Wall Street Crash (1929), 168 ‘Watanabe, Mrs’, 61, 75, 79, 82 weather derivatives, 144–5, 146 Wendt, Froukelien, 214 West Texas Intermediate, 139 Wheatley Report (2012), 184, 188 ‘window, the’ 118, 137, 188 ‘wisdom of crowds’, 204 WM/R, 187–8 World Cup 1998 France, 140 2014 Brazil, 195 World War I (1914–18), 207 X XTX, 233 Y Yale University, 110 ‘yours-and-mine’, 15–16, 18, 19, 192 Z zero coupon bonds, 118–32, 134, 138–43, 149, 152, 158, 159, 173 Zombanakis, Minos, 181–2 Zopa, 234 This ebook is copyright material and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased or as strictly permitted by applicable copyright law.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

Brandon Adams, Gustavo Bamberger, Bill Benter, John Bogle, Rick Bookstaber, Reuven Brenner, Eugene Christiansen, Emanuel Derman, Art Duquette, Dylan Evans, Doyne Farmer, Justin Fox, Kenneth French, Lisa Goldberg, James Grosjean, Ian Hacking, Michael Heneberry, Carey Hobbs, Craig Howe, James McManus, Michael Maubossin, Nick Maughan, Perry Mehrling, Robert Merton, Joe Nocera, John O’Brien, Deborah Pastor, Scott Patterson, William Poundstone, Kevin Rosema, Myron Scholes, James Stoner, Nassim Taleb, Edward Thorp, Whitney Tilson, James Ward, Paul Wilmott, and Bruce Zastera were particularly helpful. The title comes from my daughter, Aviva Pastor. Tiffany Charbonier, Bill Falloon, Stacey Fischkelta, Meg Freeborn, Sharon Polese, and other folks at John Wiley & Sons provided essential feedback and support.

From the banks of the Charles—that is, for academics far away from the action who were not betting personally—there was nothing obvious in the reported numbers coming out of Wall Street to demonstrate the change. But from the banks of the Hudson—that is, for people on Wall Street making quantitative bets—you couldn’t miss it. Smile One example is option smile and skew. Fischer Black, along with Myron Scholes and Robert Merton, had come up with an option pricing model in 1973 that was widely used on Wall Street. (Ed Thorp had developed a very similar model six years earlier, but he didn’t publish it; he used it to make money.) Practitioners noticed that options on unusual events—say, that the stock market would rise or fall more than 20 percent over a month—tended to have higher prices than the model results.

I leave it to others more qualified than I am to make these observations formal and precise. Thorp, Black, Scholes, and Merton Finance started to diverge from statistics in the decade around 1970. We could start with Ed Thorp’s first development and use of an option pricing model in the 1960s, or the publication of Fischer Black’s and Myron Scholes’s famous 1973 paper, “The Pricing of Options and Corporate Liabilities,” or the publication of Robert Merton’s paper, “Theory of Rational Option Pricing,” the same year. Popular finance books usually describe the Black-Scholes option pricing model as horrendously complex and requiring advanced mathematics.


pages: 240 words: 60,660

Models. Behaving. Badly.: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life by Emanuel Derman

Albert Einstein, Asian financial crisis, Augustin-Louis Cauchy, Black-Scholes formula, British Empire, Brownian motion, capital asset pricing model, Cepheid variable, creative destruction, crony capitalism, currency risk, diversified portfolio, Douglas Hofstadter, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Ford Model T, Great Leap Forward, Henri Poincaré, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, Isaac Newton, Johannes Kepler, law of one price, low interest rates, Mikhail Gorbachev, Myron Scholes, quantitative trading / quantitative finance, random walk, Richard Feynman, riskless arbitrage, savings glut, Schrödinger's Cat, Sharpe ratio, stochastic volatility, the scientific method, washing machines reduced drudgery, yield curve

In physics the values of the fundamental constants (the gravitational constant G, the electric charge e, Planck’s constant h, the speed of light c) are apparently timeless and universal. I doubt there will ever be a universal value for the risk premium. THE EMM AND THE BLACK-SCHOLES MODEL The best model in all of economics is the Black-Scholes Model for valuing options on stocks, an ingeniously clever extension of the EMM published in 1973 by Fischer Black and Myron Scholes.a I spent my first two years at Goldman Sachs, 1986–1987, working with Fischer Black on an extension of this model to valuing options on bonds,12 and I devoted 1993–1994 to working on an extension of Black-Scholes to stocks with variable volatility. Stocks are commonplace, but a call option on a stock is more arcane, and prior to Black and Scholes no one had a plausible clue for how to value it.

See return risk: Black-Scholes Model and CAPM and deliciousness analogy with of diffusion EMM and and ethics of designing financial products financial models and futility of using financial models and herding idiosyncratic market model for money and premium price and purpose of models purpose of theory return and uncertainty and universal value for volatility and role models/exemplars Roth, Philip rules: Feynman diagrams and nature of models and for using models S&P 500: Apple stock and EMM and Salam, AbdusSchadenfreude, Scholes, Myron Schopenhauer, Arthur Schrödinger, Erwin Schwinger, Julian Science and Reflection (Heidegger) Second World War/World War II securities: definition of Law of One Price and and ranking of securities by value unified theory of valuing of See also type of security self: control of image of understanding of and why we treat ourselves differently from others will and Senate, U.S.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Alvin Toffler, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, Carl Icahn, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, Future Shock, game design, global macro, hindsight bias, housing crisis, index fund, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, managed futures, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, Market Wizards by Jack D. Schwager, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, Teledyne, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

The story of who lost has been told repeatedly over the years; however, because trading is a zero-sum game, 151 152 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets exploring the winners was the real story. LTCM is a classic saga of the zero-sum game played out on a grand scale with trend followers as winners. “Trillion Dollar Bet,” a PBS special, described how LTCM came to be. In 1973, three economists—Fischer Black, Myron Scholes, and Robert Merton—discovered an elegant formula that revolutionized modern finance. This mathematical Holy Grail, the Black-Scholes Option Pricing Formula, was sparse and deceptively simple. It earned Scholes and Merton a Nobel Prize and attracted the attention of John Meriweather, the legendary bond trader of Salomon Brothers.

For prices to be right, of course, the people who set them must be both rational and well informed.”27 In other words, Miller and Fama believed that perfectly rational people would never pay more or less than any financial instrument was actually worth. A fervent supporter of the Efficient Markets Hypothesis, Myron Scholes was certain that markets could not make mistakes. His associate, Robert Merton, took it a step further with his continuous-time finance theory, which essentially wrapped the finance universe into a supposed tidy ball.28 Chapter 4 • Big Events, Crashes, and Panics 153 Merton’s markets were as smooth as well brewed java, in which prices would flow like cream.

Philip Anderson, a Nobel Prize Recipient in Physics, sees the dangers that come from thinking in terms of normal distributions: “Much of the real world is controlled as much by the ‘tails’ of distributions as by means or averages: by the exceptional, not the mean; by the catastrophe, not the steady drip; by the very rich, not the ‘middle class.’ We need to free ourselves from ‘average’ thinking.”45 Breaking out from average thinking results in hitting home runs (trend followers) instead of attempting and failing to slap those supposed sure-fire singles (LTCM). A footnote: Myron Scholes went on to form a new fund called Platinum Grove after LTCM’s demise. With Scholes as Chairman, Platinum Grove lost $600 million dollars during 2007–2008 during the credit market meltdown. How many funds does this particular financial genius have to blow up before the genius tag should be taken away?


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

Abraham Maslow, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, bread and circuses, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, disinformation, diversification, double helix, Edward Glaeser, financial deregulation, financial engineering, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, general purpose technology, George Akerlof, Gini coefficient, Glass-Steagall Act, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, language acquisition, Large Hadron Collider, liberal capitalism, light touch regulation, Long Term Capital Management, long term incentive plan, Louis Pasteur, low cost airline, low interest rates, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, meritocracy, Mikhail Gorbachev, millennium bug, Money creation, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, power law, price discrimination, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, systems thinking, tail risk, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, three-masted sailing ship, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, work culture , working poor, world market for maybe five computers, zero-sum game, éminence grise

In the markets the joke was that the acronym actually stood for ‘BIS Total Rip Off’, in honour of the BIS (Bank of International Settlements), whose rules had been so easily avoided. Yet alarm bells should have been ringing. The following year, the Long Term Capital Management (LTCM) hedge fund very nearly collapsed when an investment strategy built on the mathematical models of Myron Scholes and Robert Merton (who had won the Nobel Prize for economics for his theories on how to price options) went spectacularly wrong. LTCM had anticipated the crisis in the Russian bond market as part of the fallout from the Asian crisis; but it had been unable to predict the behaviour of other assets.

If this is true then, as mentioned earlier, financial data will correspond to the law of large numbers and follow the same rules that dictate the distribution of, say, tall, average and short people, dice rolls and flips of a coin. There will be a bell curve in which 95 per cent of the population is captured in two standard deviations away from the mean. (Technically known as a normal or Gaussian distribution after Carl Friedrich Gauss, who introduced the idea.) Myron Scholes and Fisher Black hypothesised back in 1973 that not just the spread of the prices of financial assets but, crucially, their volatility corresponded to the bell curve. This meant the price of a derivative, depending on the underlying value of financial assets, would tend to sit plumb middle of the volatility range.

Worse, once the system began to creak, there was a snowball effect on asset prices, collateral and confidence: liquidation by one firm put downward pressure on the assets held by numerous other firms, triggering a series of fire sales, an unravelling that ensured the so-called once-in-a-thousand-years event would arrive much sooner.35 Part of the problem was the ideological belief that financial markets were efficient. The likes of Myron Scholes were on a mission to prove the superiority of free markets and to make their own fortunes. Paying as little tax as possible was one component of their formula. In 2005 Scholes was a director of LTCM when the firm was implicated in a lawsuit accusing it of devising false accounting losses of over $100 million and tax ‘savings’ of some $40 million.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

Alan Greenspan, algorithmic trading, automated trading system, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Bretton Woods, buttonwood tree, buy and hold, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, junk bonds, locking in a profit, Long Term Capital Management, machine readable, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, Nixon triggered the end of the Bretton Woods system, pattern recognition, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, uptick rule, Vanguard fund, Y2K

Quants in the late 1990s and early 2000s learned the hard way what should have been fairly obvious—the longer one’s time horizon, the more difficult it is to predict the future. Any meteorologist or political prognosticator could have told them that. It was this eureka moment that ushered in the era of what is now known as HFT. Previously, the Quants had chosen investments with durations of months or even years. LTCM had Nobel Prize laureates Myron Scholes and Robert C. Merton on its team. The hedge fund made a highly leveraged, long-term bet on the direction of interest rates. That bet went haywire about a year after it was made when Russia unexpectedly defaulted on its sovereign bonds. They might have done better of they had called the fund Short-Term Capital Management.

., 106, 116 Rubin, Robert, 98-100 Rueckert, Cleveland, 180 Rumsfeld, Donald, 114 S S&P 500, volatility, 2 S&P 500 E-Mini futures contracts in Flash Crash, 68-69 Safian, Ken, 158 Salmon, Felix, 211-212 Saluzzi, Joseph, 11-25, 44-45, 61 Sanders, Bernie, 100-101 Sarbanes, Paul, 100 Sarbanes-Oxley Act, 100 Schapiro, Mary, 43, 52-61, 86, 97-103, 183, 188, 198, 209-210, 214, 226 Scholes, Myron, 159 Schultz, Paul, 139 Schumer, Chuck, 43-44, 56, 172, 187 Schwab, Charles, 120 Schwed, Fred, 105 Schwert, G. William, 179-180 SEC (Securities and Exchange Commission) Arnuk and Saluzzi’s finding discussed with, 44-45 Congressional pressure on, 47-59 Division of Risk, Strategy and Financial Innovation, formation of, 97 on erosion of investor confidence, 208-210 Flash Crash report, 213-227 immediate reaction to Flash Crash, 82 investigation of Flash Crash, 183-185, 189-191 consolidated tape delays, 199-205 ethics issues, 193-198 quick fix rules after Flash Crash, 85-87, 90 tracking mechanism, need for, 64 Securities Act Amendments of 1975, 113-122 Securities Investor Protection Corporation (SIPC), 62, 109, 115 self-regulation, 120 Senate.


pages: 297 words: 77,362

The Nature of Technology by W. Brian Arthur

Andrew Wiles, Boeing 747, business process, Charles Babbage, cognitive dissonance, computer age, creative destruction, double helix, endogenous growth, financial engineering, Geoffrey West, Santa Fe Institute, haute cuisine, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, knowledge economy, locking in a profit, Mars Rover, means of production, Myron Scholes, power law, punch-card reader, railway mania, Recombinant DNA, Silicon Valley, Simon Singh, sorting algorithm, speech recognition, Stuart Kauffman, technological determinism, technological singularity, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions

The value of the contract “derived” from the actual market value—hence it was called a derivative. In the 1960s, putting a proper price on derivatives contracts was an unsolved problem. Among brokers it was something of a black art, which meant that neither investors nor banks in practice could use these with confidence. But in 1973 the economists Fischer Black and Myron Scholes solved the mathematical problem of pricing options, and this established a standard the industry could rely on. Shortly after that, the Chicago Board of Trade created an Options Exchange, and the market for derivatives took off. We cannot quite say here that derivatives trading “adopted” computation.

., 49 programming of, 51–54, 56 replication of, 52 philosophy, 4, 14, 61, 97, 158, 170 photography, 66, 80–81 photonics, 69, 83 physics, 38, 202 atomic, 10, 24, 80, 114–15, 160 puzzles of, 47–50 quantum, 159 pilots, 72–73, 92 Pirsig, Robert, 216 Pittsburgh, University of, 9 Planck, Max, 57 planets, 47–49, 50, 65, 67 orbiting of, 47, 63 plastic injection molding, 25, 156 poetry, 32, 78, 79 Polak, Wolfgang, 182–83 politics, 61, 212 polymerase chain reaction, 123 Pont de Normandie, 31 potassium-argon dating, 46 pottery firing, 22, 171 power, 51, 52, 71, 73, 171, 200 see also energy; specific power sources Pratt & Whitney, 40, 93 JT9D jet engine, 93–94 pressure-measuring devices, 50, 52 printing press, 10, 75 products, 71, 210 barter and exchange of, 55 distribution and transport of, 81–84, 192, 193, 194 domination of markets by, 2, 152 prices and availability of, 152, 154, 177, 179, 192, 202 see also markets propulsion systems, 52, 108, 111–12, 120 proteins, 53, 147, 148, 208 psychology, 36, 97, 107, 212 purposed systems, 54–56, 105–6, 138, 142, 192–93 quantum phenomena, 57, 59, 66, 69 quantum theory, 123, 159, 161 quartz crystals, 49 “Question Concerning Technology, The” (Heidegger), 213–14 Quicksort computer algorithm, 17, 98 radar, 15, 17, 18, 22, 33, 39, 41, 49, 55, 56, 70, 72, 73–74, 113–14, 132, 135, 184 radiation: black-body, 57 electromagnetic, 59, 121 radio, 7, 15, 18, 74, 75, 184 components of, 30, 50, 167–68 signals processed by, 30, 33, 49, 50, 122, 167–68, 171 radiocarbon dating, 45 radiolabeling, 70 railroads, 14, 75, 107, 147, 149–50, 152, 153, 155, 192 locomotives for, 17, 145–47 Randall, John, 113–14, 122 random events, 2 raw materials, 19, 24–25 recursiveness, 37–39, 42, 46, 91, 113 resonant cavities, 113–14, 122 Ribet, Kenneth, 129 Ricardo, David, 202 Rickover, Hyman, 104 riveting machines, 29 rivets, 33 robotics, 9 rocket technology, 113, 175 roller bearings, 28 Röntgen, Wilhelm Conrad, 57 Rosati, Robert, 94 Rosenberg, Nathan, 14, 101 Santa Fe Institute, Stanislaw Ulam Memorial Lectures, 4 satellites, 41, 206 Savery, Thomas, 176 Scholes, Myron, 154 Schumpeter, Joseph, 6, 19–20, 90, 107, 180, 185, 199, 200, 202 Schwandbach bridge, 99–100 science, 7, 14 application of, 1, 27, 57–58, 60–61, 91, 162–63, 171 beauty of, 64 definitions of, 64 experiment and insight in, 57–64 Greek thought-based, 64 invention in, 126–29 investment in, 162, 170 modern, 57–58, 61–63 technology and, 29, 59–65 theoretical, 141–42 see also specific scientific disciplines science fiction, 74–75, 207, 215–16 seismic analysis, 75 semiconductors, 71 sensing systems, 52, 72–74, 150 sewer systems, 150 Shannon, Claude, 125 Shimura, Goro, 128 ships: evolution of, 16 navigation of, 25 sailing, 16, 177 see also specific ships silicon, 9, 71, 179 Silicon Valley, 28, 151, 162 Simon, Herbert, 36 “smart” systems, 12, 207, 215 Smith, Adam, 37, 202 society, 106 ideas and culture of, 10, 16, 88 influence of technology on, 4, 6, 10–12, 13 primitive, 21 sociology, 4, 6, 14, 16, 21, 106 software, 31, 50, 56, 79 Solvay process, 177 space, 47–50, 74–75, 175 see also planets; stars species, 17, 18, 31, 66, 89 evolution of, 13, 16, 107, 127–28, 188, 204 interrelatedness of, 13, 14, 32 origin of, 14, 127–28 spectroscopy, 50, 61, 80 Stanford University, 3, 162 staphylococci bacteria, 119 Starkweather, Gary, 117–18 stars, 47–50 light spectra of, 48–49, 50 oscillation of, 47–50 Star Wars, 215–16 steam engines, 10, 14, 16, 29, 73, 75, 87, 109, 147, 156, 174, 176 steam technology, 21, 74, 159 steel, 10 basic oxygen processing of, 42 open-hearth processing of, 24 see also Bessemer process stemcell regeneration, 11 Stockton and Darlington Express, 147 stoves, 10 street cars, 21 structural deepening, 3, 131–43, 163 superchargers, 140 surveying methods, 25, 30, 88 Sutter, Joseph, 92 symphonies, 54, 55, 56 systems theory, 170 tailrace, 33 Taniyama, Yutaka, 128 Tatara Bridge, 91 techniques, 5, 6, 27, 65, 169, 212 laboratory, 6, 37 modern, 57–58 refinement of, 48 sophisticated, 10 see also specific techniques technium, 28 technologies, 1–7 abstract vs. particular view of, 31–32, 39, 170 adoption, use, and diffusion of, 2, 4, 6, 9, 11–12, 13, 17, 59, 89, 152–53 assemblies and subassemblies of, 2, 3, 24, 28, 32–40, 43, 50, 53, 87, 90–94, 116, 134–35, 136–37, 139, 169, 172, 204 beauty of, 5, 78–79 changing or switching elements of, 15, 24, 29, 36, 42, 81, 87–88, 132–34, 138, 209 collapse and replacement of, 147, 177, 180, 181, 185, 192, 195 collective, 28–29, 69–85, 88, 167–89, 205 combinations of, 2–3, 15–26, 29, 32–43, 46, 51–52, 81, 89, 91, 107, 167–89 competition of, 2, 117, 138–39, 149, 159–63 complexity and sophistication of, 10, 21, 28, 34, 46, 132, 135, 159, 168 components of, 14, 18–19, 21, 23–25, 28, 29–43, 50, 54, 63, 66, 69, 70, 72–73, 79–80, 87, 96–98, 130, 133–34, 157, 169, 181, 204 conflicting definitions of, 5, 27 constraints within, 35 conventional vs. non-conventional, 55–56 core mechanism of, 51, 176–78 creation of, 2–3, 6, 12, 14, 15, 19, 21, 23, 26, 27, 43, 57, 66, 87, 90, 98–99, 106–30 current shift in character of, 24–26, 209–11 definitions of, 1, 5, 27–30, 38, 50–51, 53, 54, 60, 203 design of, 4, 12, 13, 17, 36, 39, 50, 91–95, 99–100 emergence of the world from, 4, 10, 11, 12, 171–72 evolution of, 1–6, 12–26, 29, 43, 64–70, 87–90, 105–43, 145–65, 167–89, 191–202, 203, 204–5 familiar, 6, 46 fear of, 215–16 feedback from, 2, 91, 103–4, 161 hidden, 98, 216 hierarchy of, 37–41, 92 higher vs. lower levels in, 42 history of, 4, 6, 13, 16, 75 hope in, 11, 28, 215 humanity and, 216 improvement and modification of, 2, 3, 4, 15, 16, 17, 24, 29, 36, 42, 73, 81, 87–88, 89–90, 93, 131–43, 146, 160–61, 185, 196 increasing returns and, 2 individual, 29, 70–71, 75, 78, 85, 87, 107–43, 145, 153, 163, 203 inside view of, 14–15, 18–19, 24, 87–88 interrelatedness of, 2–3, 14, 15–26, 29, 32–43 literature of, 3–4, 6, 13 lock-in and adaptive stretch of, 103, 138–41 magic and wonder of, 7, 9–10, 52 maintenance of, 175 manual, 73, 74 mature, 138, 149–50, 165, 177 mechanics and methods of, 3, 12, 18, 19, 21–24, 27–28, 30–31, 51, 55, 90, 172–89, 207–8 medieval, 10 as metabolism, 52–53, 189 miniature, 23, 24, 71 modern, 10, 12, 21, 22, 25, 65, 207, 213 nature and essence of, 4, 12, 13, 43, 50–54, 56, 87 nonphysical, 55–56 nontechnology-like, 54–56 novel, 2, 5, 6, 15, 17–19, 20, 21, 22, 23, 24, 29, 66, 105, 106–30, 143, 145, 163–64, 168, 193, 196, 203–4 opportunity niches for, 170, 174–76, 177–79, 180–81, 183, 187, 195, 199 organization and structure of, 1, 2, 14, 17, 22–23, 32–43 outside view of, 51, 87 overall theory lacking on, 4, 12–15, 21 partitioning of, 36–37, 54 phenomena, as products of, 3, 22, 24, 29, 43, 45–67, 69, 77, 85, 88, 122, 123, 124, 125, 133, 141, 145, 146, 157, 160, 162, 163, 170, 171–172, 177, 186, 188–189, 200, 201, 203, 204, 205, 215 primitive, 16, 21, 22, 171, 176, 180–81 principles and logic of, 4, 5–6, 12–15, 23–24, 25–26, 29, 32, 33, 46, 49, 55, 87 problems posed by, 11–12, 176, 197–201, 204 production and distribution of, 175 promises and threats of, 6, 9, 12 purposes and functions of, 17, 24–25, 28–31, 37–39, 40–41, 43, 54, 71, 88–89 questions about, 1–3, 9–12, 15, 43, 59–60, 107–8 radical novelty in, 17–18, 19, 107–11 real-world, 38, 41–42, 47, 50 recursive patterns of, 3, 37, 38–43, 46, 91, 110, 113, 129–30, 135, 204 revolutions in, 65, 149, 157 self-creation of, 2–3, 21, 24, 59, 167–170, 188 signature of, 55 simple, 30, 33, 36, 47, 185 skepticism and suspicion of, 7, 8, 11–12 specialized, 171–72 study of, 14–15, 18–19 supply and demand of, 172, 174–76, 196–98 support, 175–76 terminology of, 4–5 testing and analysis of, 36, 93, 112, 117, 118, 120, 131 theory of, 2, 4, 13, 14, 16, 21, 23, 25, 107, 109, 172, 203 versions of, 17, 18, 88, 89, 92–93, 95, 100, 105, 131–34, 145, 161 tectonic plates, 11 telecommunications, 150–51, 171, 206 telegraphy, 59, 60, 74, 162 telephones, 42, 59, 98 telescopes, 47, 48, 61, 64 textile technology, 65, 139, 159, 171, 192, 193, 196, 197 theater-of-war systems, 39–42 theorems, 128–129 thermodynamics, 171 thermoluminescence dating, 46 tire industry, 162 toilets, 10 tools, 20, 46, 171 Townes, Charles, 80, 115, 118, 123 trade, 160–61, 192 derivatives, 154–55, 209 foreign, 19 see also economy; markets; products trade unions, 105–6, 197 transformers, 33, 59 transistors, 69, 174, 179 transmission networks, 79 transportation, 21, 85, 200 container, 83–84 horse, 82, 147, 180 see also aircraft; automobiles; ships tree-ring dating, 45 tricycles, 73 triode vacuum tube, 168 trucks, 46, 75, 99 trust, 55 Truxal, John G., 60 turbines, 19, 33, 34, 52, 65, 93, 103–4, 115, 134–35, 168 turbojets, 22, 108–9, 137 Tyndall, John, 119 typesetting, 76 Usher, Abbott Payson, 20 vacuums, 83 vacuum tubes, 59, 146, 150, 167–68, 169, 179 Varela, Francisco, 2, 170 variation and selection, 17, 18, 127, 128, 132, 188 Vaughan, Diane, 139–40 Venturi, Robert, 212–13 Verne, Jules, 74–75 vertebrates, 32 Vincenti, Walter, 15 von Ohain, Hans, 20, 111–12 watchmaking, 36, 38 water, 67, 171 flow of, 33, 147, 176 heavy (D2O), 104 light (H2O), 104–5 storage of, 29, 33 Waterloo, Battle of, 125 waterwheels, 10, 73, 147, 177 Watson, James, 58, 61 Watt, James, 109, 156 wavelength division multiplexer, 28 waves, 22, 33, 40, 80, 122, 146, 168, 171 WD-40, 93 wealth, 10, 11, 71, 197, 210, 214 weapons, 171 Westinghouse, 104 wheels, 46, 66, 73 whisky, 43 Whittle, Frank, 20, 111, 113, 115–16, 136–37 Wideröe, Rolf, 114–15, 121 Wiles, Andrew, 128–29 Williams, Michael, 126 wood, 45, 57 World War I, 119, 202 World War II, 36–37, 73, 75, 113 Wright brothers, 120 Wright Brothers’ Flyer, 96, 132 Xenopus laevis frog, 148 xerography, 33, 108, 117–18 Xerox, 117 X-rays, 57, 61, 122, 171 ABOUT THE AUTHOR W.


pages: 265 words: 74,000

The Numerati by Stephen Baker

Berlin Wall, Black Swan, business process, call centre, correlation does not imply causation, Drosophila, full employment, illegal immigration, index card, information security, Isaac Newton, job automation, job satisfaction, junk bonds, McMansion, Myron Scholes, natural language processing, off-the-grid, PageRank, personalized medicine, recommendation engine, RFID, Silicon Valley, Skype, statistical model, surveillance capitalism, Watson beat the top human players on Jeopardy!, workplace surveillance

Say it rains in Tucson from zero to six times per month, and you listen to the weather report, which has been right 19 of the past 20 days, only three times a week. One of your three jackets is suede. What are the chances it'll get drenched tomorrow? Imagine that same question with one thousand variables, and you've stepped into the stochastic world. A generation ago, a crew of math whizzes led by Myron Scholes and Fischer Black focused their mastery of probability on finance, where they calculated risk and put prices on it. This led to a panoply of new financial products, from options to hedging strategies. It was a math revolution on Wall Street. The mathematicians were replacing hunches, wholesale, with science.

See Medications Privacy not a concern in animal testing, [>] concerns about loss of, [>], [>], [>]–[>], [>] as issue in Europe, [>] people's voluntary lifting of, [>]–[>], [>] personal details as violating, [>] and phones, [>], [>]–[>], [>]–[>] policies regarding shoppers', [>] protections for, [>]–[>], [>]–[>], [>]–[>], [>]–[>] of workers, [>]–[>], [>] Probability, [>]–[>], [>], [>], [>] Probst, Katharina, [>] Proxies, [>], [>]–[>], [>] Psychology, [>], [>], [>] Pulleyblank, William, [>] Quantification, [>] See also Mathematical models Quants, [>], [>] Raghavan, Prabhakar, [>]–[>], [>], [>] Remy, Martin, [>] Republican Party, [>], [>]–[>], [>], [>], [>]–[>], [>] "Resourcefuls" tribe, [>], [>] Retail store data, [>]–[>], [>], [>], [>], [>], [>] See also Advertisers RFID technology, [>] "Right Clicks" tribe, [>]–[>], [>]–[>], [>], [>], [>] Romantic-movie lovers, i—[>], [>]–[>], [>], [>] Root, Mabel, [>] Rosenberger, Larry, [>] Rove, Karl, [>], [>] Sandia National Labs (New Mexico), [>]–[>] Schatz, James, [>], [>], [>]–[>], [>], [>] Scholes, Myron, [>] The Sea, the Sea (Murdoch), [>] Search engine optimization (SEO), [>] Second Life (virtual world), [>] Sensors in animals, [>]–[>] medical, [>], [>]–[>], [>]–[>], [>], [>], [>] SEO (search engine optimization), [>] Serotonin, [>], [>] [>]-Hour Task Force, [>] Shakespeare, William, [>], [>], [>] Shoppers (consumers) averaging of, [>] bloggers as, [>]–[>], [>] choices available to, [>]—ii, [>], [>] data collected about, [>], [>], [>], [>], [>]–[>], [>], [>], [>], [>]–[>], [>], [>]–[>], [>], [>], [>], [>] lists of, [>], [>], [>]–[>], [>] targeting of individual, by advertisers, [>], [>], [>]–[>], [>], [>], [>], [>] See also Advertisers; Credit Sifry, David, [>]–[>] Silverstein, Craig, [>]–[>] Simplex algorithms, [>]–[>] Simplex triangle, [>]–[>] Singapore, [>], [>] Small Blue search engine, [>] "Smart bombs" (medical), [>] "Smart carts," [>]–[>], [>], [>]–[>] Smith, J.


pages: 305 words: 75,697

Cogs and Monsters: What Economics Is, and What It Should Be by Diane Coyle

3D printing, additive manufacturing, Airbnb, Al Roth, Alan Greenspan, algorithmic management, Amazon Web Services, autonomous vehicles, banking crisis, barriers to entry, behavioural economics, Big bang: deregulation of the City of London, biodiversity loss, bitcoin, Black Lives Matter, Boston Dynamics, Bretton Woods, Brexit referendum, business cycle, call centre, Carmen Reinhart, central bank independence, choice architecture, Chuck Templeton: OpenTable:, cloud computing, complexity theory, computer age, conceptual framework, congestion charging, constrained optimization, coronavirus, COVID-19, creative destruction, credit crunch, data science, DeepMind, deglobalization, deindustrialization, Diane Coyle, discounted cash flows, disintermediation, Donald Trump, Edward Glaeser, en.wikipedia.org, endogenous growth, endowment effect, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, Evgeny Morozov, experimental subject, financial deregulation, financial innovation, financial intermediation, Flash crash, framing effect, general purpose technology, George Akerlof, global supply chain, Goodhart's law, Google bus, haute cuisine, High speed trading, hockey-stick growth, Ida Tarbell, information asymmetry, intangible asset, Internet of things, invisible hand, Jaron Lanier, Jean Tirole, job automation, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, knowledge worker, Les Trente Glorieuses, libertarian paternalism, linear programming, lockdown, Long Term Capital Management, loss aversion, low earth orbit, lump of labour, machine readable, market bubble, market design, Menlo Park, millennium bug, Modern Monetary Theory, Mont Pelerin Society, multi-sided market, Myron Scholes, Nash equilibrium, Nate Silver, Network effects, Occupy movement, Pareto efficiency, payday loans, payment for order flow, Phillips curve, post-industrial society, price mechanism, Productivity paradox, quantitative easing, randomized controlled trial, rent control, rent-seeking, ride hailing / ride sharing, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Robinhood: mobile stock trading app, Ronald Coase, Ronald Reagan, San Francisco homelessness, savings glut, school vouchers, sharing economy, Silicon Valley, software is eating the world, spectrum auction, statistical model, Steven Pinker, tacit knowledge, The Chicago School, The Future of Employment, The Great Moderation, the map is not the territory, The Rise and Fall of American Growth, the scientific method, The Signal and the Noise by Nate Silver, the strength of weak ties, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Uber for X, urban planning, winner-take-all economy, Winter of Discontent, women in the workforce, Y2K

Economic sociologists now use it for economic models that build their own reality, rather than merely describing an external reality. The canonical example of performative economics is the model for pricing financial options. Robert K. Merton’s son, Robert C. Merton, was jointly awarded the Nobel Memorial Prize in Economics in 1997 for devising this model (along with Myron Scholes; Fisher Black, the other co-author of the original Black-Scholes model, had died earlier).3 The investment company Robert C. Merton co-founded to put the model into practice, Long Term Capital Management (LTCM), went bankrupt with losses of $4.6 billion in 2000, in a kind of trial run for the later financial crisis.

., 197 Robinhood, 27 Robinson, Marilynne, 19–20 robotics, 137, 154 Rodrik, Dani, 97 Rogoff, Ken, 101 Romer, Paul, 90, 140, 209 Rosen, Sherwin, 173–74 Ross, Andy, 83–84 Roth, Al, 44, 142 Rothschild, E., 120 Royal Commissions, 65 Royal Economic Society, 9, 86 Rubinstein, Ariel, 90–91 rules of thumb, 47–48, 90, 117, 212 Ruskin, John, 20 Samuelson, P. A., 122, 191 Sandel, Michael, 34, 39, 43, 107, 119 San Francisco, 59, 132–33 Schelling, Thomas, 143, 160 Schmelzer, M., 190 Scholes, Myron, 23–25, 28 Schumpter, Joseph, 41, 143 Scientific American, 92 Scott, James, 63 Seabright, Paul, 40 self-fulfilling prophecies, 5, 22–23, 154–55, 157 self-interest, 1, 6, 13, 23, 46–47, 109, 117–20, 123 self-referencing, 63, 104–5, 145, 206 Sen, Amartya, 64, 125, 128–29, 151 Sennheiser, 98 Sen-Stiglitz-Fitoussi Commission on the Measurement of Economic Performance, 151 separation protocol: behavioural economics and, 119–20, 124; competition and, 120, 123–25; decision making and, 120; empirical work and, 119, 124, 128; free market and, 123–24; homo economicus and, 119; interventions and, 123, 125, 127; macroeconomics and, 124; politics and, 121, 124; rationality and, 123–24; regulation and, 125; self-interest and, 119; welfare and, 120–27 servers, 25–26, 141, 170 service-based economy, 185, 197–98, 205 shadow banking, 76 Shalizi, Cosma, 183, 185 Shiller, Robert, 29–30, 159 shocks, 10, 12, 51, 71, 136, 166, 188, 190, 192, 213 Siemens, 196 Signal and the Noise, The (Silver), 94 Silver, Nate, 94 Sinclair, Jayne, 14 Sinclair, Peter, 14, 16 skill-biased technical change, 132 skills, 88, 128, 169–70 Small but Significant Non-Transitory Increase in Price (SSNIP) test, 204 smartphones, 46, 138–39, 164, 171, 173, 177, 195, 198 Smith, Adam, 41, 106, 120, 125 Smith, John Maynard, 48 Smith, Vernon, 47 Snow, C.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

Alan Greenspan, Alvin Roth, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, benefit corporation, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, democratizing finance, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial engineering, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, Great Leap Forward, Ida Tarbell, income inequality, information asymmetry, invisible hand, John Bogle, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, social contagion, Steven Pinker, tail risk, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

The accumulation through time of these small price changes amounts to a result that is not random but that instead provides discovery of true economic value—a value that is highly useful in the allocation of economic resources and in generating our livelihoods. The discovery of a mathematical law to describe the price of a stock option in terms of the price of the underlying stock (as exempli ed by the famous mathematical formula derived by Fischer Black and Myron Scholes) is an example of a conservation law in finance.4 The option price is driven by exactly the same shocks as a ect the price of the underlying stock, but with a nonlinear transformation of e ect, a transformation that is at rst challenging to comprehend but that, upon su cient re ection, seems almost obvious.

New York: Commerce Clearing House. Bernasek, Anna. 2010. The Economics of Integrity. New York: HarperCollins. Bhagwati, Jagdish, and T. N. Srinivasan. 1994. India’s Economic Reforms. Delhi: Ministry of Finance. Black, Fischer. 1986. “Noise.” Journal of Finance 41(3):529–43. Black, Fischer, and Myron Scholes. 1973. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81(3):637–54. Blank, Rebecca M., and Michael S. Barr, eds. 2009. Insu cient Funds: Savings, Assets, Credit and Banking among Low-Income Households. New York: Russell Sage Foundation. Bloom, Paul. 2004. Descartes’ Baby: How the Science of Child Development Explains What Makes Us Human.

., 185 Sarkozy, Nicolas, 2 Saverin, Eduardo, 49 Save the Children, 200 savings: encouraging, 214; lottery-linked, 177; rates of, 153–54; retirement, 214 savings banks, 44 SBA. See Small Business Administration Scarf, Herbert, 69, 131 Schneider, Daniel, 177 Schoar, Antoinette, 31 Schoenberg, Arnold, 136 Scholes, Myron, 132 Schultz, Wolfram, 59, 60, 139–40 Schumpeter, Joseph A., 122 Schwed, Fred, Jr., 79, 161–62 science. See brain; physics scientists, 188, 190 Securities and Exchange Commission (SEC), 60, 87, 88, 96, 98, 99 securities regulations, 35–36, 46, 80, 96–97, 161. See also regulation, financial securitized debt, 43, 52–55.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, book value, Bretton Woods, British Empire, business cycle, buy and hold, California energy crisis, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, Glass-Steagall Act, Greenspan put, guns versus butter model, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, McMansion, Menlo Park, Michael Milken, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, Robert Solow, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stock buybacks, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

Those Daffy Nobels There had been plenty of warnings that not much had changed since the derivative failures in 1994. Ignorance was essential to derivative operations. We need look no further than LongTerm Capital Management and two of its employees, Robert Merton and Myron Scholes. The pair received the Nobel Prize in economic sciences in 1997 “for a new method to determine the value of derivatives.” Upon receiving his award in Stockholm, Myron Scholes “singled out two companies—General Electric and Enron—as having the ability to outcompete existing financial firms. He noted, ‘Financial products are becoming so specialized that, for the most part, it would be prohibitively expensive to trade them in organized markets.’

(Herbert Greenspan), 9–10 Reed, John, 114–115 Rees, Albert, 42 Regan, Donald, 79, 82, 92 Resolution Trust Corporation (RTC), 89 Restructuring of debt, 291 Reuss, Henry, 65 Riegle, Donald, 85 Risk management, by banks, 184–186 Rivlin, Alice, 348 RJR Nabisco, 116–117 Roach, Stephen, 49–50 Robertson, Julian, 223, 228–229 Rockefeller, Happy, 74 Rockefeller, Laurence, 75 Rohatyn, Felix, 75, 138 Röpke, Wilhelm, 145 Rosenberg, David, 358 Rostenkowski, Dan, 110 Roth, Emory, 352 Rowan, Hobart, 67 Royal Society for the Arts, 200 RTC (Resolution Trust Corporation), 89 Rubin, Robert, 136, 143, 276, 277, 300, 322–323, 354 Rubinstein, Mark, 103–104, 109, 110 Russell, Richard, 345–347 Russia, 172 Rutgers University, 37 S Salinger, Pierre, 75 Salmon, Jean, 45 Salomon Brothers, 183 Salomon Smith Barney, 233 Salon.com, 342 Samuelson, Paul, 26 San Remo apartments (New York City), 352–353, 356 Santomero, Anthony, 259 Sarkozy, Nicolas, 341 Sasser, Jim, 98–99 Savings, personal, 364 in 1999, 258 Bernanke’s perspective on, 310 in early 1990s, 253 proposed tax on, 288 and recession of 1990s, 126 Savings and loans (S&Ls), 86, 88–93 (See also Lincoln Savings and Loan Association) Scholes, Myron, 183, 187 Schoolsnet.com, 221 Schultz, George, 42 Schultze, Charles, 61, 66, 230n.11 Schumer, Chuck, 219 Schwartz, Anna, 344 Schwartzman, Stephen, 311–312, 320–322 Sears, Roebuck and Company, 99, 100 SEC (Securities and Exchange Commission), 87 Securities and Exchange Commission (SEC), 87 Seiders, David, 280 Seidman, L.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, classic study, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

It would happen only once in four million years of trading.78 This was the planet imagined by some of the most brilliant financial economists of modern times. Perhaps it is not altogether surprising that it turned out to look like Greenwich, Connecticut, one of the blandest places on Earth. In 1993 two mathematical geniuses came to Greenwich with a big idea. Working closely with Fisher Black of Goldman Sachs, Stanford’s Myron Scholes had developed a revolutionary new theory of pricing options. Now he and a third economist, Harvard Business School’s Robert Merton, hoped to turn the so-called Black-Scholes model into a money-making machine. The starting point of their work as academics was the long-established financial instrument known as an option contract, which (as we saw in Chapter 4) works like this.

When losses began to mount, many participants simply withdrew from the market, leaving LTCM with a largely illiquid portfolio of assets that couldn’t be sold at any price. Moreover, this was an ever more integrated Planet Earth, in which a default in Russia could cause volatility to spike all over the world. ‘Maybe the error of Long Term’, mused Myron Scholes in an interview, ‘was . . . that of not realizing that the world is becoming more and more global over time.’ Meriwether echoed this view: ‘The nature of the world had changed, and we hadn’t recognized it.’98 In particular, because many other firms had begun trying to copy Long-Term’s strategies, when things went wrong it was not just the Long-Term portfolio that was hit; it was as if an entire super-portfolio was haemorrhaging.99 There was a herd-like stampede for the exits, with senior managers at the big banks insisting that positions be closed down at any price.

Santiago (Chile) 218 Santo Tomás, Domingo de 23 Sassetti, Francesco 46 Saving, Thomas R. 221 savings: against future surprises 229 discouraged by taxes 211 gluts 293 international comparisons 333-5 need for banks 56 pre-modern societies 184 property purchase as 229 savings - cont. see also savings banks savings banks 56 and bonds 100 British 56 Savings & Loan (S&L) associations (‘thrifts’) 247-9 regulatory environment of 254 Savonarola, Girolamo 47 Savoy, Victor Amadeus II, Duke of 138 Scholes, Myron 320-23 Schumpeter, Joseph 348-9 Schwartz, Anna 161 science 342. see also technological innovation scope issues 346 Scotland 138. see also Glasgow Scottish Ministers’ Widows Fund 193-6 Scottish Widows 196 Scott, Sir Walter 195-7 Scruggs, Richard F. (‘Dickie’) 180-82 sea levels 224 securitas 185 securities: new types 74 see also asset-backed securities; assets; securitization Securities Act 314n.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

For one, the arbitragefocused fund drifted into global macro trades and its subsequent unwind had ramifications for global macro markets.Two, it offers insights into what can go wrong at a hedge fund, as well as shed light on such important issues as liquidity, risk management, and correlations. And three, almost every interviewee in this book mentions LTCM. LTCM was started in 1994 by infamous Salomon Brothers proprietary trader John Meriwether, who hired an all-star cast of financial minds including former Fed vice chairman David Mullins and Nobel Prize winners Robert Merton and Myron Scholes (pioneers in option pricing theory and methodology). LTCM started with $1.3 billion in assets from a who’s who list of investors and initially focused on fixed income arbitrage opportunities (which had become more attractive as spreads widened after the bond market rout of 1994). The original core strategy was to bet on the convergence of the spread between “off-the-run” and “on-the-run” bonds, as well as other relative value and arbitrage opportunities, primarily in fixed income.

Money is always going somewhere no matter what, so I just have to stay attuned. But I am more patient in letting THE FLOOR TRADER 207 moves develop before I get in. As I’ve gotten older, my patience has improved. Do you express your views through options? I don’t, but I have a funny story about that. Myron Scholes is on the board of the CME and we went out to dinner one night. I had a couple of drinks in me already and said to him,“Myron, options are for pussies.” Everybody at the table was laughing because here was this idiot floor trader telling a Nobel Prize winner that options are for pussies. But he replied, “I’m not disagreeing with you.

See also Arbitrage Risk aversion, 107, 115 Risk capital, 24 Risk curve, 328 Risk-free rate, 196, 342 Risk management strategies, 7–8, 25, 32, 50, 53–54, 61–62, 131, 137–138, 172, 192, 204, 206, 213–214, 285, 293–294, 333–334 Risk premium, 55 Risk/reward analysis, 98, 110–111, 126, 296 Risk-to-return ratio, 62 Robertson, Julian, xi, 8, 10, 21, 23, 27–28, 245–247, 277 Roditi, Nick, 269, 278 Rogers, Jim, 8, 210, 217–221, 223–239, 269–271, 278 Rogers International Commodity Index, 218 Rubin, Robert, 32, 245 Rumors, 249, 268 Russia/Russian rubles, 22–23, 49–50, 64–65, 203–204, 211, 237–238, 277, 280, 283, 286, 289, 290 Russian crisis 1998, 10, 21–23, 26, 54, 64, 80, 292–294, 299–300, 310 Russian Equity Index, 65 Russian stock market index (RTSI$), 22 INDEX S&P 500 index, 27–28, 193, 212–213, 217, 273–274, 282 Safe harbor, 205 Salomon Brothers, 24 Samuelson, Paul, 9 Scholes, Myron, 24, 207 Secular trends, 234 Sell-offs, 20, 118, 175, 295, 302 SemperMacro, 71, 72 Seykota, Ed, 9 Sharpe ratio, 62, 342–343 Short-dated volatility, 55 Short positions, xii, 58. See also specific traders Short selling, 272–274, 282, 330 Short stocks, 29 Short-term trading, 69 Siberia, 261 Sidelsky, Robert, 5–6 Silver, 206, 230 Singapore, 63 Site visits, 261 Siva-Jothy, Christian, 31, 72–101 Slower Fool Theory, 204–205 Small caps, 177, 219 Soros, George, xi, xiv, 8, 10, 12, 14–16, 20, 23, 27–30, 32, 206, 209, 233, 238, 246, 268–269, 273–279, 282–283 Soros Fund Management, 12, 15, 20, 27, 29, 31, 33, 93, 269–270, 273–274, 278–279 South America, 82.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

In addition to the random walk model of stock prices, the period between 1950 and 1970 saw the development of the mean-variance approach to portfolio diversification, which Harry Markowitz, another Chicago economist, pioneered; the capital asset pricing model, which a number of different scholars developed independently of one another; and the Black-Scholes option pricing formula, which Fischer Black, an applied mathematician from Harvard, and Myron Scholes, a finance Ph.D. from Chicago, developed. Some of the mathematics used in these theories is pretty befuddling, which helps explain why there are so many physicists and mathematicians working on Wall Street, but the basic ideas underpinning them aren’t so difficult. Many of them originated with Bachelier and his coin-tossing view of finance.

In 1998, the giant (and unregulated) hedge fund Long-Term Capital Management, which was a big player in many derivatives markets, had to be propped up and then wound down by a consortium of Wall Street banks, with the Fed playing a coordinating role. The demise of Long-Term Capital, which had two economics Nobel winners as partners—Robert Merton and Myron Scholes—demonstrated the limitations of counterparty regulation. When the secretive firm opened its books to its Wall Street lenders and counterparties, many of them were astonished to discover that its leverage ratio was close to thirty to one, and that its derivatives exposures totaled about $1.4 trillion.

Paul’s Cathedral (London) Salomon Brothers Salomon Smith Barney Salzburg, University of Samsung Group Samuelson, Paul San Francisco Chronicle Sante Fe Railroad Sargent, Thomas Saunders, Anthony Savage, Jimmy Saving Capitalism from the Capitalists (Rajan and Zingales) Savings & Loan (S&L) industry, collapse of Scharfstein, David Schlesinger, Karl Schlick, Moritz Scholes, Myron Schumpeter, Joseph Schwartz, Alan Schwartz, Anna J. Schweitzer, Albert Science Scott, Andrew Scott, Hal Scottish Enlightenment Seale, Bobby Securities and Exchange Commission (SEC) Securities Industry and Financial Markets Association Seidman, L. William Sen, Amartya Senate, U.S.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, Alan Greenspan, AOL-Time Warner, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, Easter island, endogenous growth, eurozone crisis, financial engineering, financial innovation, first-past-the-post, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market fundamentalism, Mexican peso crisis / tequila crisis, military-industrial complex, Money creation, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, Suez crisis 1956, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

While the Europeans’ sense of vindication was dealt a savage blow by the ensuing euro crisis, Asians can afford a large dose of smugness. Indeed, in much of Asia the Crash of 2008 and its aftermath are referred to as the ‘North Atlantic Crisis’. 5. Toxic theory In 1997, the Nobel Prize for Economics went to Robert Merton and Myron Scholes for developing ‘a pioneering formula for the valuation of stock options’. ‘Their methodology’, trumpeted the awarding committee’s press release, ‘has paved the way for economic valuations in many areas. It has also generated new types of financial instruments and facilitated more efficient risk management in society.’

., 165; attitude towards Britain, 69; and bank regulation, 10; New Deal, 45, 58–9 Roosevelt, Theodore (‘Teddy’), 180 Royal Bank of Scotland (RBS), 6, 151, 156; takeover of ABN-Amro, 119–20 Rudd, Kevin, 212 Russia, financial crisis, 190 Saudi Arabia, oil prices, 98 Scandinavia, Gold Standard, 44 Scholes, Myron, 13 Schopenhauer, Arthur, 19 Schuman, Robert, 75 Schumpter, Joseph, 34 Second World War, 45, 55–6; aftermath, 87–8; effect on the US, 57–8 seeds, commodification of, 163 shares, in privatized companies, 137, 138 silver, prices, 96 simulated markets, 170 simulated prices, 170 Singapore, 91 single currencies, ICU, 60–1 slave trade, 28 SMEs (small and medium-sized enterprises), 186 social welfare, 12 solidarity (asabiyyah), 33–4 South East Asia, 91; financial crisis, 190, 191–5, 213; industrialization, 86, 87 South Korea see Korea sovereign debt crisis, 205 Soviet Union: Africa, 79; disintegration, 201; Marshall Plan, 72–3; Marxism, 181, 182; relations with the US, 71 SPV (Special Purpose Vehicle), 174 see also EFSF stagflation, 97 stagnation, 37 Stalin, Joseph, 72–3 steel production, in Germany, 70 Strauss-Kahn, Dominique, 60, 254, 255 Summers, Larry, 230 strikes, 40 sub-prime mortgages, 2, 5, 6, 130–1, 147, 149, 151, 166 success, paradox of, 33–5, 53 Suez Canal trauma, 69 Suharto, President of Indonesia, 97 Summers, Larry, 3, 132, 170, 173, 180 see also Geithner–Summers Plan supply and demand, 11 surpluses: under capitalism, 31–2; currency unions, 61; under feudalism, 30; generation in the EU, 196; manufacturing, 30; origin of, 26–7; privatization of, 29; recycling mechanisms, 64–5, 109–10 Sweden, Crash of 2008, 155 Sweezy, Paul, 73 Switzerland: Crash of 2008, 155; UBS, 148–9, 151 systemic failure, Crash of 2008, 17–19 Taiwan, 191, 192 Tea Party (US), 162, 230, 231, 281 technology, and globalization, 28 Thailand, 91 Thatcher, Margaret, 117–18, 136–7 Third World: Crash of 2008, 162; debt crisis, 108, 219; interest rate rises, 108; mineral wealth, 106; production of goods for Walmart, 125 tiger economies, 87 see also South East Asia Tillman Act (1907), 180 time, and economic models, 139–40 Time Warner, 117 tin, prices, 96 toxic theory, 13–17, 115, 133–9, 139–42 trade: balance of, 61, 62, 64–5; deficits (US), 111, 243; global, 27, 90; surpluses, 158 trades unions, 124, 137, 202 transfer unions, New Deal, 65 Treasury Bills (US), 7 Treaty of Rome, 237 Treaty of Versailles, 237 Treaty of Westphalia, 237 trickle-down, 115, 135 trickle-up, 135 Truman Doctrine, 71, 71–2, 77 Truman, Harry, 73 tsunami, effects of, 194 UBS, 148–9, 151 Ukraine, and the Crash of 2008, 156 UN Security Council, 253 unemployment: Britain, 160; Global Plan, 96–7; rate of, 14; US, 152, 158, 164 United States see US Unocal, 106 US economy, twin deficits, 22–3, 25 US government, and South East Asia, 192 US Mortgage Bankers Association, 161 US Supreme Court, 180 US Treasury, 153–4, 156, 157, 159; aftermath of the Crash of 2008, 160; Geithner–Summers Plan, 171–2, 173; bonds, 227 US Treasury Bills, 109 US (United States): aftermath of the Crash of 2008, 161–2; assets owned by foreign state institutions, 216; attitude towards oil price rises, 97–8; China, 213–14; corporate bond purchases, 228; as a creditor nation, 57; domestic policies during the Global Plan, 82–5; economy at present, 184; economy praised, 113–14; effects of the Crash of 2008, 2, 183; foreign-owned assets, 225; Greek Civil War, 71; labour costs, 105; Plaza Accord, 188; profit rates, 106; proposed invasion of Afghanistan, 106–7; role in the ECSC, 75; South East Asia, 192 value, costing, 50–1 VAT, reduced, 156 Venezuela, oil prices, 97 Vietnamese War, 86, 91–2 vital spaces, 192, 195, 196 Volcker, Paul: 2009 address to Wall Street, 122; demand for dollars, 102; and gold convertibility, 94; interest rate rises, 99; replaced by Greenspan, 10; warning of the Crash of 2008, 144–5; on the world economy, 22, 100–1, 139 Volcker Rule, 180–1 Wachowski, Larry and Andy, 50 wage share, 34–5 wages: British workers, 137; Japanese workers, 185; productivity, 104; prophecy paradox, 48; US workers, 124, 161 Wal-Mart: The High Cost of Low Price (documentary, Greenwald), 125–6 Wall Street: Anglo-Celtic model, 12; Crash of 2008, 11–12, 152; current importance, 251; Geithner–Summers Plan, 178; global profits, 23; misplaced confidence in, 41; private money, 136; profiting from sub-prime mortgages, 131; takeovers and mergers, 115–17, 115, 118–19; toxic theory, 15 Wallace, Harry, 72–3 Walmart, 115, 123–7, 126; current importance, 251 War of the Currents, 39 Washington Mutual, 153 weapons of mass destruction, 27 West Germany: labour costs, 105; Plaza Accord, 188 Westinghouse, George, 39 White, Harry Dexter, 59, 70, 109 Wikileaks, 212 wool, as a global commodity, 28 working class: in Britain, 136; development of, 28 working conditions, at Walmart, 124–5 World Bank, 253; origins, 59; recession prediction, 149; and South East Asia, 192 World Trade Organization, 78, 215 written word, 27 yen, value against dollar, 96, 188, 193–4 Yom Kippur War, 96 zombie banks, 190–1


pages: 365 words: 88,125

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

accelerated depreciation, affirmative action, Alan Greenspan, AOL-Time Warner, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, business logic, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, deskilling, digital divide, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, Glass-Steagall Act, hiring and firing, Hyman Minsky, income inequality, income per capita, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, microcredit, Myron Scholes, North Sea oil, offshore financial centre, old-boy network, post-industrial society, price stability, profit maximization, profit motive, purchasing power parity, rent control, Robert Solow, shareholder value, short selling, Skype, structural adjustment programs, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, Toyota Production System, trade liberalization, trickle-down economics, women in the workforce, working poor, zero-sum game

And when the rationality assumption does not hold, we need to think about the role of the market and of the government in a very different way even from the market failure framework, which after all also assumes that we are rational. Let me explain. If you’re so smart … In 1997, Robert Merton and Myron Scholes were awarded the Nobel Prize in economics for their ‘new method to determine the value of derivatives’. Incidentally, the prize is not a real Nobel prize but a prize given by the Swedish central bank ‘in memory of Alfred Nobel’. As a matter of fact, several years ago the Nobel family even threatened to deny the prize the use of their ancestor’s name, as it had been mostly given to free-market economists of whom Alfred Nobel would not have approved, but that is another story.

Index active economic citizenship xvi, xvii Administrative Behaviour (Simon) 173–4 Africa see Sub-Saharan Africa AIG 172–3 Air France 131 AOL 132–3 apartheid 214–16 Argentina education and growth 181 growth 73 hyperinflation 53–4 Austria geography 121 government direction 132 protectionism 70 balance of payments 97–100, 101 Baldursson, Fridrik 235 Bangladesh entrepreneurship 159–60 and microfinance 161–2, 163, 164 Bank of England 252 (second) Bank of the USA 68 Bank for International Settlements (BIS) 262 bankruptcy law 227–8 Barad, Jill 154 Bard College 172 Bateman, Milford 162 Baugur 233 Baumol, William 250 Bebchuk, Lucian 154 behaviouralist school 173–4 Belgium ethnic division 122 income inequality 144, 146 manufacturing 70, 91 R&D funding 206 standard of living 109 Benin, entrepreneurship 159 Bennett, Alan 214 Besley, Tim 246 big government 221–2, 260–61 and growth 228–30 see also government direction; industrial policy BIS (Bank for International Settlements) 262 Black, Eugene 126 Blair, Tony 82, 143, 179 borderless world 39–40 bounded rationality theory 168, 170, 173–7, 250, 254 Brazilian inflation 55 Britain industrial dominance/decline 89–91 protectionism 69–70 British Academy 246–7 British Airways 131 brownfield investment 84 Brunei 258 Buffet, Warren 30, 239 Bukharin, Nikolai 139 Bunning, Senator Jim 8 Burkina Faso (formerly Upper Volta) 121, 200 Bush, George W. 8, 158, 159, 174 Bush Sr, George 207 business sector see corporate sector Cameroon 116 capital mobility 59–60 nationality 74–5, 76–7 capitalism Golden Age of 142, 147, 243 models 253–4 capitalists, vs. workers 140–42 captains of industry 16 Carnegie, Andrew 15 Case, Steve 132–3 Cassano, Joe 172–3 CDOs (collateralized debt obligations) 238 CDSs (credit default swaps) 238 CEO compensation see executive pay, in US Cerberus 77–8 Chavez, Hugo 68 chess, complexity of 175–6 child-labour regulation 2–3, 197 China business regulation 196 communes 216 economic officials 244 industrial predominance 89, 91, 93, 96 as planned economy 203–4 PPP income 107 protectionism and growth 63–4, 65 Chocolate mobile phone 129 Chrysler 77–8, 191 Chung, Ju-Yung 129 Churchill, Winston 253 climate factors 120–21 Clinton, Bill 143 cognitive psychology 173–4 collateralized debt obligations (CDOs) 238 collective entrepreneurship 165 communist system 200–204 Concorde project 130–31 conditions of trade 5 Confucianism 212–13 Congo (Democratic Republic) 116, 121 consumption smoothing 163 cooperatives 166 corporate sector importance 190–91 planning in 207–9 regulation effect 196–8 suspicion of 192–3 see also regulation; transnational corporations Cotton Factories Regulation Act 1819 2 credit default swaps (CDSs) 238 Crotty, Jim 236–8 culture issues 123, 212–13 Daimler-Benz 77–8 Darling, Alistair 172 de-industrialization 91 balance of payments 97–100, 101 causes 91–6 concerns 96–9 deflation, Japan 54 deliberation councils 134 Denmark cooperatives 166 protectionism 69 standard of living 104, 106, 232–3 deregulation see under regulation derivatives 239 Detroit car-makers 191–2 developing countries entrepreneurship and poverty 158–60 and free market policies 62–3, 71–3, 118–19, 261–2 policy space 262–3 digital divide 39 dishwashers 34 distribution of income see downward redistribution of income; income irregularity; upward redistribution of income domestic service 32–3 double-dip recession xiii downward redistribution of income 142–3, 146–7 Dubai 235 Duménil, Gérard 236 East Asia economic officials 249–50 educational achievements 180–81 ethnic divisions 122–3 government direction 131–2 growth 42, 56, 243–4 industrial policy 125–36, 205 École Nationale d’Administration (ENA) 133 economic crises 247 Economic Policy Institute (EPI) 144, 150 economists alternative schools 248–51 as bureaucrats 242–3 collective imagination 247 and economic growth 243–5 role in economic crises 247–8 Ecuador 73 Edgerton, David 37 Edison, Thomas 15, 165, 166 education and enterprise 188–9 higher education effect 185–8 importance 178–9 knowledge economy 183–5 mechanization effect 184–5 outcome equality 217–18 and productivity 179–81 relevance 182–3 Elizabeth II, Queen 245–7 ENA (École Nationale d’Administration) 133 enlightened self-interest 255–6 entrepreneurship, and poverty 157–8 and collective institutions 165–7 as developing country feature 158–60 finance see microfinance environmental regulations 3 EPI (Economic Policy Institute) 144, 150 equality of opportunity 210–11, 256–7 and equality of outcome 217–20, 257 and markets 213–15 socio-economic environment 215–17 equality of outcome 217–20 ethnic divisions 122–3 executive pay and non-market forces 153–6 international comparisons 152–3 relative to workers’ pay 149–53, 257 US 148–9 fair trade, vs. free trade 6–7 Fannie Mae 8 Far Eastern Economic Review 196 Federal Reserve Board (US) 171, 172, 246 female occupational structure 35–6 Fiat 78 financial crisis (2008) xiii, 155–6, 171–2, 233–4, 254 financial derivatives 239, 254–5 financial markets deregulation 234–8, 259–60 effects 239–41 efficiency 231–2, 240–41 sector growth 237–9 Finland government direction 133 income inequality 144 industrial production 100 protectionism 69, 70 R&D funding 206 welfare state and growth 229 Fischer, Stanley 54 Ford cars 191, 237 Ford, Henry 15, 200 foreign direct investment (FDI) 83–5 France and entrepreneurship 158 financial deregulation 236 government direction 132, 133–4, 135 indicative planning 204–5 protectionism 70 Frank, Robert H 151 Franklin, Benjamin 65–6, 67 Freddie Mac 8 free market boundaries 8–10 and developing countries 62–3, 71–3, 118–19, 261–2 labour see under labour nineteenth-century rhetoric 140–43 as political definition 1–2 rationale xiii–xiv, 169–70 results xiv–xv, xvi–xvii system redesign 252, 263 see also markets; neo-liberalism free trade, vs. fair trade 6–7 Fried, Jesse 154 Friedman, Milton 1, 169, 214 Galbraith, John Kenneth 16, 245 Garicano, Luis 245 Gates, Bill 165, 166, 200 General Electric (GE) 17, 45, 86, 237 General Motors Acceptance Corporation (GMAC) 194, 237 General Motors (GM) 20, 22, 45, 80, 86, 154, 190–98 decline 193–6 financialization 237 pre-eminence 191–2 geographical factors 121 Germany blitzkrieg mobility 191 CEO remuneration 152–3 cooperatives 166 emigration 69 hyperinflation 52–4 industrial policy 205 manufacturing 90 R&D funding 206 welfare state and growth 228–9 Ghana, entrepreneurship 159 Ghosn, Carlos 75–6, 78 globalization of management 75–6 and technological change 40 GM see General Motors GMAC (General Motors Acceptance Corporation) 194, 237 Golden Age of Capitalism 142, 147, 243 Goldilocks economy 246 Goodwin, Sir Fred 156 Gosplan 145 government direction balance of results 134–6 and business information 132–4 failure examples 130–31 and market discipline 44–5, 129–30, 134 share ownership 21 success examples 125–6, 131–4 see also big government; industrial policy Grameen Bank 161–4 Grant, Ulysses 67 Great Depression 1929 24, 192, 236, 249, 252 greenfield investment 84 Greenspan, Alan 172, 246 Hamilton, Alexander 66–7, 69 Hayami, Masaru 54 Hennessy, Peter 246–7 higher education 185–8 Hirschman, Albert 249 History Boys (Bennett) 214 Hitler, Adolf 54 home country bias 78–82, 83, 86–7 Honda 135 Hong Kong 71 household appliances 34–6, 37 HSBC 172 Human relations school 47 Hungary, hyperinflation 53–4 hyperinflation 52–4 see also inflation Hyundai Group 129, 244 Iceland financial crisis 232–4, 235 foreign debt 234 standard of living 104–5 ICT (Information and Communication Technology) 39 ILO (International Labour Organization) 32, 143–4 IMF see International Monetary Fund immigration control 5, 23, 26–8, 30 income per capita income 104–11 see also downward redistribution of income; income inequality; upward redistribution of income income inequality 18, 72–3, 102, 104–5, 108, 110, 143–5, 147, 247–8, 253, 262 India 99, 121 indicative planning 205 indicative planning 204–6 Indonesia 234 industrial policy 84, 125–36, 199, 205, 242, 259, 261 see also government direction Industrial Revolution 70, 90, 243 infant industry argument 66–8, 69–70, 71–2 inflation control 51–2 and growth 54–6, 60–61 hyperinflation 52–4 and stability 56–61 Information and Communication Technology (ICT) 39 institutional quality 29–30, 112–13, 115, 117, 123–4, 165–7 interest rate control 5–6 international dollar 106–7 International Labour Organization (ILO) 32, 143–4 International Monetary Fund (IMF) 54–5, 57, 66, 72, 244, 262 SAPs 118 International Year of Microcredit 162 internet revolution 31–2 impact 36–7, 38, 39 and rationality 174 investment brownfield/greenfield 84 foreign direct investment 83–5 share 18–19 invisible reward/sanction mechanisms 48–50 Ireland financial crisis 234–5 Italy cooperatives 166 emigrants to US 103 Jackson, Andrew 68 Japan business regulation 196 CEO remuneration 152–3 deflation 54 deliberation councils 134 government direction 133–4, 135, 259 indicative planning 205 industrial policy 131, 135, 242–5 industrial production 100 production system 47, 167 protectionism 62, 70 R&D funding 206 Jefferson, Thomas 67–8, 239 job security/insecurity 20, 58–61, 108–9, 111, 225–8, 247, 253, 259 Journal of Political Economy 34 Kaldor, Nicolas 249 Keynes, John Maynard 249 Kindleberger, Charles 249 knowledge economy 183–5 Kobe Steel 42–3, 46 Kong Tze (Confucius) 212 Korea traditional 211–13 see also North Korea; South Korea Koufax, Sandy 172 Kuwait 258 labour free market rewards 23–30 job security 58–60 in manufacturing 91–2 market flexibility 52 regulation 2–3 relative price 33, 34 Latin America 32–3, 55, 73, 112, 122, 140, 196–7, 211, 245, 262 Latvia 235 Lazonick, William 20 Lenin, Vladimir 138 Levin, Jerry 133 Lévy, Dominique 236 LG Group 129, 134 liberals neo-liberalism xv, 60, 73 nineteenth-century 140–42 limited liability 12–15, 21, 228, 239, 257 Lincoln, Abraham 37, 67 List, Friedrich 249 London School of Economics 245–6 LTCM (Long-Term Capital Management) 170–71 Luxemburg, standard of living 102, 104–5, 107, 109, 232–3, 258 macro-economic stability 51–61, 240, 259, 261 Madoff, Bernie 172 Malthus, Thomas 141 managerial capitalism 14–17 Mandelson, Lord (Peter) 82–3, 87 manufacturing industry comparative dynamism 96 employment changes 91–2 importance 88–101, 257–9 productivity rise 91–6, 184–5 relative prices 94–5 statistical changes 92–3 Mao Zedong 215–16 Marchionne, Sergio 78 markets and bounded rationality theory 168, 173–6, 177, 254 conditions of trade 5 and equality of opportunity 213–15 failure theories 250 financial see financial markets government direction 44–5, 125–36 government regulation 4–6, 168–9, 176–7 participation restrictions 4 price regulations 5–6 and self-interest 44–5 see also free market Marx, Karl 14, 198, 201, 208, 249 Marxism 80, 185, 201–3 mathematics 180, 182–3 MBSs (mortgage-backed securities) 238 medicine’s popularity 222–4 Merriwether, John 171 Merton, Robert 170–71 Michelin 75–6 microfinance critique 162 and development 160–62 Microsoft 135 Minsky, Hyman 249 Monaco 258 morality, as optical illusion 48–50 Morduch, Jonathan 162 mortgage-backed securities (MBSs) 238 motivation complexity 46–7 Mugabe, Robert 54 NAFTA (North American Free Trade Agreement) 67 National Health Service (UK) 261 nationality of capital 74–87 natural resources 69, 115–16, 119–20, 121–2 neo-liberalism xv, 60, 73, 145 neo-classical school 250 see also free market Nestlé 76–7, 79 Netherlands CEO remuneration 152–3 cooperatives 166 intellectual property rights 71 protectionism 71 welfare state and growth 228–9 New Public Management School 45 New York Times 37, 151 New York University 172 Nissan 75–6, 84, 135, 214 Nobel Peace Prize 162 Prize in economics 170, 171–2, 173, 208, 246 Nobel, Alfred 170 Nokia 135, 259–60 North American Free Trade Agreement (NAFTA) 67 North Korea 211 Norway government direction 132, 133, 205 standard of living 104 welfare state and growth 222, 229 Obama, Barack 149 OECD (Organization for Economic Cooperation and Development) 57, 159, 229 Oh, Won-Chul 244 Ohmae, Kenichi 39 Opel 191 Opium War 9 opportunities see equality of opportunity Organization for Economic Cooperation and Development (OECD) 57, 159, 229 organizational economy 208–9 outcomes equality 217–20 Palin, Sarah 113 Palma, Gabriel 237 Park, Chung-Hee 129 Park, Tae-Joon 127–8 participation restrictions 4 Perot, Ross 67 Peru 219 PGAM (Platinum Grove Asset Management) 171 Philippines, education and growth 180, 181 Phoenix Venture Holdings 86 Pigou, Arthur 250 Pinochet, Augusto 245 PISA (Program for International Student Assessment) 180 Plain English Campaign 175 planned economies communist system 200–204 indicative systems 204–6 survival 199–200, 208–9 Platinum Grove Asset Management (PGAM) 171 Pohang Iron and Steel Company (POSCO) 127–8 pollution 3, 9, 169 poor individuals 28–30, 140–42, 216–18 Portes, Richard 235 Portman, Natalie 162 POSCO (Pohang Iron and Steel Company) 127–8 post-industrial society 39, 88–9, 91–2, 96, 98, 101, 257–8 Poverty Reduction Strategy Papers (PRSPs) 118 see also SAPs PPP (purchasing power parity) 106–9 Preobrazhensky, Yevgeni 138–40, 141 price regulations 5–6 stability 51–61 Pritchett, Lant 181 private equity funds 85–6, 87 professional managers 14–22, 44–5, 166, 200 Program for International Student Assessment (PISA) 180 protectionism and growth 62–3, 72–3 infant industry argument 66–8, 69–70, 71–2 positive examples 63–5, 69 PRSPs see Poverty Reduction Strategy Papers purchasing power parity (PPP) 106–9 R&D see research and development (R&D) Rai, Aishwarya 162 Rania, Queen 162 rationality see bounded rationality theory RBS (Royal Bank of Scotland) 156 real demand effect 94 regulation business/corporate 196–8 child labour 2–3, 197 deregulation 234–8, 259–60 legitimacy 4–6 markets 4–6, 168–9, 176–7 price 5–6 Reinhart, Carmen 57, 59 Renault 21, 75–6 Report on the Subject of Manufactures (Hamilton) 66 The Rescuers (Disney animation) 113–14 research and development (R&D) 78–9, 87, 132, 166 funding 206 reward/sanction mechanisms 48–50 Ricardo, David 141 rich individuals 28–30, 140–42 river transport 121 Rogoff, Kenneth 57, 59 Roodman, David 162 Roosevelt, Franklin 191 Rover 86 Royal Bank of Scotland (RBS) 156 Rubinow, I.M. 34 Ruhr occupation 52 Rumsfeld, Donald 174–5 Rwanda 123 Santander 172 SAPs (Structural Adjustment Programs) 118, 124 Sarkozy, Nicolas 90 Scholes, Myron 170–71 Schumpeter, Joseph 16, 165–7, 249 Second World War planning 204 (second) Bank of the USA 68 self-interest 41–2, 45 critique 42–3 enlightened 255–6 invisible reward/sanction mechanisms 48–50 and market discipline 44–5 and motivation complexity 46–7 Sen, Amartya 250 Senegal 118 service industries 92–3 balance of payments 97–100, 101 comparative dynamism 94–5, 96–7 knowledge-based 98, 99 Seychelles 100 share buybacks 19–20 shareholder value maximisation 17–22 shareholders government 21 ownership of companies 11 short-term interests 11–12, 19–20 shipbuilders 219 Simon, Herbert 173–6, 208–9, 250 Singapore government direction 133 industrial production 100 PPP income 107 protectionism 70 SOEs 205 Sloan Jr, Alfred 191–2 Smith, Adam 13, 14, 15, 41, 43, 169, 239 social dumping 67 social mobility 103–4, 220 socio-economic environment 215–17 SOEs (state-owned enterprises) 127, 132, 133, 205–6 South Africa 55, 121 and apartheid 213–16 South Korea bank loans 81 economic officials 244 education and growth 181 ethnic divisions 123 financial drive 235 foreign debt 234 government direction 126–9, 133–4, 135, 136 indicative planning 205 industrial policy 125–36, 205, 242–5 inflation 55, 56 job insecurity effect 222–4, 226, 227 post-war 212–14 protectionism 62, 69, 70 R&D funding 206 regulation 196–7 Soviet Union 200–204 Spain 122 Spielberg, Steven 172 Sri Lanka 121 Stalin, Josef 139–40, 145 standard of living comparisons 105–7 US 102–11 Stanford, Alan 172 state owned enterprises (SOEs) 127, 132, 133, 205–6 steel mill subsidies 126–8 workers 219 Stiglitz, Joseph 250 Structural Adjustment Programs (SAPs) 118, 124 Sub-Saharan Africa 73, 112–24 culture issues 123 education and growth 181 ethnic divisions 122–3 free market policies 118–19, 262 geographical factors 121 growth rates 73, 112, 116–19 institutional quality 123 natural resources 119–20, 121–2 structural conditions 114–16, 119–24 underdevelopment 112–13, 124 Sutton, Willie 52 Sweden 15, 21–2 CEO remuneration 152 income inequality 144 industrial policy 205 industrial production 100 per capita income 104 R&D funding 206 welfare state and growth 229 Switzerland CEO remuneration 152–3 ethnic divisions 122 geography 121 higher education 185–6, 188 intellectual property rights 71 manufacturing 100, 258 protectionism 69, 71 standard of living 104–6, 232–3 Taiwan business regulation 196 economic officials 244 education and growth 180 government direction 136 indicative planning 205 protectionism 69, 70 Tanzania 116 TARP (Troubled Asset Relief Program) 8 tax havens 258 technological revolution 31–2, 38–40 telegraph 37–8 Telenor 164 Thatcher, Margaret 50, 225–6, 261 Time-Warner group 132–3 TIMSS (Trends in International Mathematics and Science Study) 180, 183 Toledo, Alejandro 219 Toyota and apartheid 214 production system 47 public money bail-out 80 trade restrictions 4 transnational corporations historical debts 80 home country bias 78–82, 83, 86–7 nationality of capital 74–5, 76–7 production movement 79, 81–2 see also corporate sector Trends in International Mathematics and Science Study (TIMSS) 180, 183 trickle-down economics 137–8 and upward distribution of income 144–7 Trotsky, Leon 138 Troubled Asset Relief Program (TARP) 8 2008 financial crisis xiii, 144, 155–6, 171–2, 197–8, 233–4, 236, , 238–9, 245–7, 249, 254 Uganda 115–16 uncertainty 174–5 unemployment 218–19 United Kingdom CEO remuneration 153, 155–6 financial deregulation 235–6, 237 NHS 261 shipbuilders 219 see also Britain United Nations 162 United States economic model 104 Federal Reserve Board 171, 172, 246 financial deregulation 235–8 immigrant expectations 103–4 income inequality 144 inequalities 107–11 protectionism and growth 64–8, 69 R&D funding 206 standard of living 102–11 steel workers 219 welfare state and growth 228–30 United States Agency for International Development (USAID) 136 university education effect 185–8 Upper Volta (now Burkina Faso) 200 upward redistribution of income 143–4 and trickle-down economics 144–7 Uruguay growth 73 income inequality 144 USAID (United States Agency for International Development) 136 vacuum cleaners 34 Venezuela 144 Versailles Treaty 52 Vietnam 203–4 Volkswagen government share ownership 21 public money bail-out 80 wage gaps political determination 23–8 and protectionism 23–6, 67 wage legislation 5 Wagoner, Rick 45 Wall Street Journal 68, 83 Walpole, Robert 69–70 washing machines 31–2, 34–6 Washington, George 65, 66–7 Welch, Jack 17, 22, 45 welfare economics 250 welfare states 59, 110–43, 146–7, 215, 220, 221–30 and growth 228–30 Wilson, Charlie 192, 193 Windows Vista system 135 woollen manufacturing industry 70 work to rule 46–7 working hours 2, 7, 109–10 World Bank and free market 262 and free trade 72 and POSCO 126–8 government intervention 42, 44, 66 macro-economic stability 56 SAPs 118 WTO (World Trade Organization) 66, 262 Yes, Minister/Prime Minister (comedy series) 44 Yunus, Muhammad 161–2 Zimbabwe, hyperinflation 53–4


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What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, buy and hold, Carl Icahn, centralized clearinghouse, clean water, compensation consultant, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, income inequality, index fund, information asymmetry, invisible hand, John Bogle, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, Paul Volcker talking about ATMs, payment for order flow, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, seminal paper, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

The adjustments to the shape of the curve were many, but the fundamental assumption, that the variability of the outcomes was predictable, was largely unchallenged. 19. International Monetary Fund, “IMF Performance in the Run-up to the Financial and Economic Crisis: IMF Surveillance in 2004–07” (International Monetary Fund, Independent Evaluation Office, January 10, 2011), http://www.ieo-imf.org/ieo/pages/NewsLinks107.aspx. 20. Myron Scholes and Robert Merton were both directors of Long-Term Capital Management. Wikipedia.org/wiki/Long_Term_Capital_Management. 21. John Maynard Keynes, General Theory of Employment Interest and Money (Snowball Publishing, 2012), bk. 5, chap. 21. 22. Friedrich von Hayek, “The Pretense of Knowledge,” Nobel Prize acceptance speech, 1974, http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/hayek-lecture.html. 23.

See also Pension funds Revenue sharing, 31 Risk: categorization of loans and, 129, 175, 212–13 diversification and, 21–22, 44–45, 240–41n35, 242–43n57 fiduciary duty and, 140 financial industry and reduction of, 17 gaps in managing, 171–74 insurers and, 22 modeling, 12–13, 39–44, 161–65, 240n27 uncertainty and, 172, 261n35 Rock Center for Corporate Governance, Stanford University, 82–83 Rothschild, Victor, 17 Rotman School of Management, 100 Royal Society of the Arts, 243n57, 255n12 Rule of law, 184 Rumsfeld, Donald, 172 Russia, social media and demands for finance industry transparency in, 115–16 S&P 1500, 67 S&P 500, 45–46, 49, 51 Safety, banks and, 20, 22, 211, 212, 216 Sarbanes-Oxley Act (US), 10 Save Darfur Coalition, 120 Savers. See Citizen investors/savers Schmidt, Breno, 102 Scholes, Myron, 260n20 Schwartz, Barry, 52 Scott, Andrew, 171 SEC (Securities and Exchange Commission), 52, 88, 91, 107, 204, 257n32, 265n14, 266n27 SHARE. See Shareholder Association for Research and Education (SHARE) Share price, 66, 71, 148 ShareAction, 89, 111, 121, 225 Sharegate, 90–91 Shareholder activism, agency capitalism and, 76 Shareholder Association for Research and Education (SHARE), 121 Shareholder resolutions, mutual fund votes on, 102 Shareowners: board of directors and, 18 rollback of powers, 11 Short volatility strategies, 239n25 “The Short Long” (Haldane), 66 Short-term buying and selling, 150–51 Short-termism, 8, 10, 63–66, 68, 71, 148, 228.


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

"there is no alternative" (TINA), "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, air traffic controllers' union, Alan Greenspan, banking crisis, basic income, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, currency risk, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial repression, fixed income, full employment, Garrett Hardin, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, low interest rates, means of production, moral hazard, Myron Scholes, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, Tragedy of the Commons, union organizing, winner-take-all economy, Wolfgang Streeck

Lin, ‘Income Dynamics, Economic Rents and the Financialization of the US Economy’, American Sociological Review, vol. 76/4, 2011, pp. 538–59. 71 Fig. 1.8 shows four countries where the compensation effect was especially marked. It is worth noting that Sweden too (along with other Scandinavian countries) belongs in this group. 72 Among the main names here are Eugene Fama (father of the ‘efficient market hypothesis’), Merton H. Miller (co-founder of the Modigliani-Miller theorem), Harry Markowitz, Robert Merton, Myron Scholes and Fischer Black. Most have taught at the University of Chicago and appear on the list of winners of the so-called Nobel Prize in economics, awarded by the Swedish central bank (Riksbank). 73 This became clear in summer 2012, during the discussions on an EU ‘rescue package’ for Spanish banks.

See also executive pay rights, 1.1, 1.2, 1.3, 2.1, 2.2, 2.3, 2.4n76, 3.1 risk propensity, 1.1, 2.1n40, 2.2 Romney, Mitt, 3.1n50, 3.2 Rosenfeld, Jake Rösler, Philipp Rubinstein, David Sallusti, Alessandro Sarkozy, Nicolas, 3.1, 3.2, 4.1n6 Sarrazin, Thilo: Europa braucht den Euro nicht savings, 1.1, 2.1, 2.2n59, 3.1 Scandinavia, 1.1, 1.2, 1.3, 2.1. See also Denmark; Sweden Schäfer, Armin Schäuble, Wolfgang, 2.1n71, 4.1 Schiller, Karl, 1.1, 1.2 Schmidt, Helmut Scholes, Myron schooling Schröder, Gerhard, 2.1, 2.2n37, 3.1 Schumpeter, Joseph, 1.1, 1.2n50, 2.1, 2.2 ‘self-regulated markets’, 1.1, 1.2, 1.3 ‘shareholder value’, 1.1, 2.1 Shonfield, Andrew: Modern Capitalism Sicily, 3.1, 3.2, 3.3n72, 3.4 Slovakia social class. See class social democracy, 1.1, 2.1, 2.2, 3.1, 3.2, 3.3; demise/elimination, 3.4, 3.5; post – World War II, 1.2n55, 2.3, 4.1n26 Social Democratic Party of Germany (SPD), 1.1, 2.1n37, 3.1n76 socialism, 1.1, 2.1n25, 3.1; France; Hayek view; Schumpeter and Weber view, 1.2, 2.2.


pages: 291 words: 81,703

Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen

Amazon Mechanical Turk, behavioural economics, Black Swan, brain emulation, Brownian motion, business cycle, Cass Sunstein, Charles Babbage, choice architecture, complexity theory, computer age, computer vision, computerized trading, cosmological constant, crowdsourcing, dark matter, David Brooks, David Ricardo: comparative advantage, deliberate practice, driverless car, Drosophila, en.wikipedia.org, endowment effect, epigenetics, Erik Brynjolfsson, eurozone crisis, experimental economics, Flynn Effect, Freestyle chess, full employment, future of work, game design, Higgs boson, income inequality, industrial robot, informal economy, Isaac Newton, Johannes Kepler, John Markoff, Ken Thompson, Khan Academy, labor-force participation, Loebner Prize, low interest rates, low skilled workers, machine readable, manufacturing employment, Mark Zuckerberg, meta-analysis, microcredit, Myron Scholes, Narrative Science, Netflix Prize, Nicholas Carr, off-the-grid, P = NP, P vs NP, pattern recognition, Peter Thiel, randomized controlled trial, Ray Kurzweil, reshoring, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, Skype, statistical model, stem cell, Steve Jobs, Turing test, Tyler Cowen, Tyler Cowen: Great Stagnation, upwardly mobile, Yogi Berra

Larry Kaufman, who developed the evaluation function for the Rybka program, and who is the mastermind of the Komodo program, graduated from MIT with an undergraduate degree in economics in 1968. He went to work on Wall Street as a broker and soon started developing his own form of options-pricing theory, working independently of Fischer Black and Myron Scholes; Scholes later won a Nobel Prize for that contribution. Kaufman’s theory was based on ideas of Brownian motion and the logistic function, the latter of which he took from formulas for calculating chess ratings. In the 1970s he made money by applying his options-pricing work through a trading firm and stopped when the profits went away, and he has since dedicated his life to chess and computer chess, including his work on Rybka and Komodo.

., 234 Russia, 20 Rybka (chess program) and computer chess matches, 72 and evaluation of chess play, 203, 224–25 and Freestyle chess, 47 and human collaboration, 135, 168 and human intuition, 114–15 and performance evaluation, 104 power of, 68 and training human chess players, 102, 106–7, 120, 124, 192–93 Santa Cruz, California, 9–10 Scholes, Myron, 203 Schwarzenegger, Arnold, 134 science, engineering, and math majors (STEM), 21, 22, 27 scientific research and bureaucracy, 210 economics, 221–28 and impossible problems, 211–17 increasing complexity of, 205–6 machine science, 217–20 specialization in, 206–11, 219 screening systems, 121 searching skills, 151–55 Second Life, 145 self-awareness programs, 135 self-education, 188–94, 202 self-employment, 59–63 self-scrutiny, 14 self-service, 113, 118 service sector, 22, 62, 169 Shannon, Claude, 68–69 shanty towns, 245–46 Shogun (game), 135 short-run spending hypothesis, 53–54 Shredder (chess program), 78, 81–82, 105 Sicily, 174–75 Simon, Herbert, 75–76 simulation, 200, 210 “singularity” hypothesis, 137–38 Siri, 7, 17, 72, 119, 121, 149 Siu, Henry, 55 sketches, 146, 147 “Skynet,” 134 Skype, 146 “slackers,” 51, 246 smart phones, 92, 152 Smith, Adam, 28–29, 215 Smith, Vaughan, 26 Snow, Peter, 187 social contract and the fiscal crunch, 231–51 and inequality, 229–31 and political trends, 251–59 social interactions, 12–13, 73, 142 social networks, 188, 209–10, 223 social safety net, 231 social sciences, 224, 227 Social Security, 233, 234–35, 237, 247 social unrest, 253–55, 257 South Korea, 8 Southeast Asia, 171 Soviet Union, 168, 189, 252 Spain, 173–74 Spark (chess program), 70–72, 155–56 specialization in the sciences, 206–11, 219 spelling bees, 187–88 Spence, Michael, 176 spending trends, 54 standardization, 126–31 Stanford University, 193 state budgets, 237 stem-cell research, 17 Stephen, Zackary, 78 stock trading, 74 Stockfish (chess program), 68, 70–72, 155–56 string theory, 212–14 structural unemployment, 37, 55 Sunstein, Cass, 105 supermarkets, 118 supply and demand, 234 support service, 169 Sweden, 161 Switzerland, 161 Tang, Hangwi, 89 taxes and tax policy and the fiscal crunch, 232–34, 236 and political trends, 254, 256, 258 progressive taxation, 256–57 “tax incidence,” 234 TCEC Stage 2a (chess tournament), 156 Tea Party Movement, 251, 256 teaching schools, 196 team-orientation, 28, 36, 207 technical support, 111–13 Technique 2011, 140, 142–43 technological progress, 133 The Terminator (1984), 134 Texas, 239, 241, 247 textile mills, 8 Thaler, Richard, 105 Thatcher, Margaret, 235 theory development, 221–22, 223, 225–26 therapy, online, 145 Thoresen, Martin, 155–56 threshold earners, 202 Thrun, Sebastian, 189, 191 time management, 81 Toiletgate, 149–50 Topalov, Vaselin, 149 tourism, 174, 175 transparency in business, 130 Transportation Safety Administration (TSA), 10 Trefler, Daniel, 164 TripAdvisor, 16 Turing, Alan, 68–69, 141, 143–44 Turing test, 83, 139–51 “tutor kings,” 200–201 Twitter, 154 underemployment, 50, 164 unemployment and freelancing, 59–63 gender disparity in, 31 and geographic trends, 172 and the Great Recession, 54–59 and immigration, 163–71 and in-flow rate, 58 and intelligent machines, 45–50 labor force participation rate, 46 recent trends, 50–54 structural, 37 unskilled labor, 19, 56 US Air Force, 20–21 US Congress, 255 US military, 57 US Supreme Court, 238 USA Memory Championships, 152 utopian visions, 136 Vancouver, British Columbia, 241 Venezuela, 171 Vidal, Gore, 257 video games, 185–88 Virginia Tech, 183–84 virtual schools, 181 vision systems (robotic), 116 visual arts, 146, 147 voice recognition, 119 Vonnegut, Kurt, 126, 247–48 wages and the fiscal crunch, 236 and freelancing, 59–60 and gender, 52–53 and geographic trends, 171–73 and immigration, 163–71 impact of intelligent machines, 136 wages (cont.)


pages: 303 words: 84,023

Heads I Win, Tails I Win by Spencer Jakab

Alan Greenspan, Asian financial crisis, asset allocation, backtesting, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, book value, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, crowdsourcing, Daniel Kahneman / Amos Tversky, diversification, dividend-yielding stocks, dogs of the Dow, Elliott wave, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, fear index, fixed income, geopolitical risk, government statistician, index fund, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, Market Wizards by Jack D. Schwager, Mexican peso crisis / tequila crisis, money market fund, Myron Scholes, PalmPilot, passive investing, Paul Samuelson, pets.com, price anchoring, proprietary trading, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Robert Shiller, robo advisor, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, subprime mortgage crisis, survivorship bias, technology bubble, transaction costs, two and twenty, VA Linux, Vanguard fund, zero-coupon bond, zero-sum game

It’s a misnomer, but the CBOE Volatility Index, or VIX, is an interesting and useful indicator of how much traders are willing to pay to sleep better at night. The VIX as we know it today was developed by a Vanderbilt University professor in 1992 and is based on a Nobel Prize–winning 1973 option pricing formula by Fischer Black and Myron Scholes that, through some complicated math, tells us how much stock volatility is expected over the next thirty days. The higher it is, the more nervous traders are. The VIX isn’t always right, though. In fact, it’s frequently wrong because actual volatility in the market rarely resembles what traders assume.

See also Baron Rothschild card game royalty trusts, 200–201 Russia, 33–34, 87, 103, 166–67, 238 S&P 1500, 173 S&P 500, 33, 60, 89, 107, 152, 158–59, 203–5 in 1930s, 75 beating it, 97, 110, 138, 171–72, 187, 224 declines in, 53–54, 91–92 and earnings growth, 90–92, 140 and hedge funds, 164–65, 171–73 investing in, 13–14, 31, 37, 39–40, 52, 82 predictions of, 126, 144–45 ranking of, 133–37 rises in, 40, 88, 239, 241–42 and target prices, 88 thirty-year rolling return of, 67–68 S&P 500 Dividend Aristocrats, 227 S&P 500 Total Return Index, 83 Salomon Brothers, 165 Samuelson, Paul, 29, 51 Samuelson, Robert J., 29 SandRidge Mississippian Trust I, 200 Scholes, Myron, 240 Schwab U.S. Dividend Equity ETF, 227 Schwager, Jack, 108 Schwartz, Marvin, 233 Schwed, Fred, 149–50 securities, 37, 82, 88, 202 Securities and Exchange Commission, 202 Securities Industry Association, 37 “Seer-Sucker Theory: The Value of Experts in Forecasting, The” (Armstrong), 118 Seides, Ted, 171–72, 174–75 Seife, Charles, 125 September 11, 2001, 40, 58, 241 Sharpe, William, 156 Shearson Lehman, 125 Sherden, William A., 126–27 Shiller, Robert, 92–94 short sellers, 174, 199, 232–33 SigFig, 82–83, 217 SINdex, 189 Smith, Ben, 142–43 Social Security Trust Fund, 70 Soros, George, 168 SouthernSun Small Cap Fund, 154 SPDR S&P 500 ETF, 222, 227 Spitzer, Eliot, 134 standard deviation, 39–40, 62–63, 105, 167 standard of living, 21 Statman, Meir, 21–22, 234 Steinhardt, Michael, 254 stock market beating it, 99, 102–6, 109–11, 136, 145, 152–53, 155, 159–60, 175, 189, 219–22, 227, 254 extremes, 40, 92, 128, 237–39, 241, 245, 250–51 first ever, 234 how to gauge it, 237–43 patterns in, 58, 60–61, 94, 257 peaks of, 31, 38, 232, 245 rebounds in, 53–55, 58, 61, 123–24 volatility of, 6, 22, 27, 33, 38, 40, 47, 56, 63, 69, 74–76, 84, 103, 203–4, 235–40, 255, 257 worst days of, 45–47, 51, 53, 73, 229 See also bear market; bull market; crashes stock picking, 25–26, 79, 98, 103, 107–8, 113, 120, 131–33, 136–38, 152, 155, 195, 225–26.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Thorp, whose interest was gambling and beating the casino at roulette and baccarat, developed a model, anticipating the Black-Scholes equation. With a background in physics and mathematics, Fischer Black worked at Arthur D. Little, a financial consulting firm. While at the University of Chicago, Black collaborated with Myron Scholes, whose Ph.D. focused on using arbitrage to ensure that securities with similar risks offered similar returns. Black and Scholes built upon Kassouf and Thorp’s idea of hedging options using the underlying stock. The value of the option must be determined by the value of the stock. As the stock price changes, so should the price of the option.

Investors paid a 2 percent management fee and 25 percent incentive fee on earnings after a threshold level of return. The operation sought to replicate Salomon Brothers’ successful fixed income arbitrage unit. Joining Meriwether were key Salomon traders Eric Rosenfield, Lawrence Hilibrand, Victor Haghani, and Greg Hawkins. Nobel Prize winners Robert Merton and Myron Scholes, as well as former Fed vice-chairman David Mullins, also joined. The principals invested, in some cases their entire wealth, in LTCM. They bristled with indignation at suggestions that LTCM was a hedge fund. LTCM’s strategies were vague, emphasizing research, sophisticated analysis, proprietary modeling, relative value, and convergence trading.

On the Charlie Rose Show, Taleb dismisses all criticism as ad hominen, a logical fallacy that the validity of a premise is linked to the advocating person. Statisticians do not like the grandiose prose or tangential literary flights that Taleb defends, arguing that his book is a work of literature and philosophy. Taleb suggests that Myron Scholes, the co-author of the famed option pricing model, return his Nobel Prize as he is responsible for the crisis. He points to the failures of LTCM (where Scholes was a partner) and a subsequent hedge fund he started. Taleb suggests Scholes should be playing Sudoku in a retirement home, not lecturing anyone on risk.


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

Abraham Wald, affirmative action, Alan Greenspan, banking crisis, Berlin Wall, Bretton Woods, business cycle, classic study, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, Lao Tzu, liquidity trap, means of production, Modern Monetary Theory, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, price stability, public intellectual, rent control, road to serfdom, Robert Bork, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

He would engage a particular student in a dialogue, and once engaged no escape . . . was possible. Exit lines like “Well, I’ll have to think about it” were no use: “Let’s think about it now,” Friedman would say.18 Other Nobel laureates in economics to date who were students at Chicago when Friedman taught there include Harry Markowitz, who received the prize in 1990; Myron Scholes, who received it in 1997; and James Heckman, who received it in 2000. Friedman recalls his approach to students on their dissertations: “When I was advising doctoral students about their theses, they would come in and say . . . a lot’s been done on . . . [a] subject. There is no subject on which there isn’t more to be done.”19 In 1953 correspondence, he reveals a good understanding of deficiencies in the dissertation approach: “When the student turns to his thesis, he is largely thrown on his own....

Friedman Foundation, 228, 229 Milton Friedman Prize for Advancing Liberty, 236 minimum wage, 64, 170–72 Mints, Lloyd, 22–23, 54, 62, 115, 162 Mises, Ludwig von, 139, 142, 144, 218, 221, 206 Mitchell, Wesley Clair, 2, 17, 20, 26, 38–39, 49, 57, 85, 113 Modigliani, Franco, 155, 157 monetary theory and policy, 23–24, 38, 86–90, 107–110, 156, 162–63 during the Great Contraction, 118–28 MF on, 87–88, 148, 170, 212, 232–33 MF’s influence on, 73–74, 238 MF’s teaching of, 86, 105 money supply and, 115–28 monetary velocity, 23–24, 110, 161 money supply, 160–61, 168, 171, 211, 213, 218 decline in, 18, 113, 119–22 Mont Pelerin Society, 132, 136, 148, 164–66, 215–16, 219 Morgenthau, Henry, 42–43 Moynihan, Daniel Patrick, 171 Mundell, Robert, 90 NAIRU (nonaccelerating inflation rate of unemployment), 161 Nash, George, 166 National Bureau of Economic Research, 2, 16, 17, 26, 27, 36, 37–38, 135, 232 national parks, 172, 173 Nef, John, 23, 54 New Deal, 33–35, 39, 114, 118, 125–26, 135, 187 New Economics, 180 Newman, Peter, 74 Neils Bohr Institute of Physics, 56 Niskanen, David, 235 Nixon, Richard, 17, 73, 174, 179–80, 185–89, 198, 206, 207, 232 Nobel laureates in economics: Arrow, Kenneth, 26, 56 Becker, Gary, 88 Buchanan, James, 87 Coase, Ronald, 167 Heckman, James, 91 Kuznets, Simon, 39 Lucas, Robert, 91 Markowitz, Harry, 91 Modigliani, Franco, 155 Samuelson, Paul, 21 Scholes, Myron, 91 Solow, Robert, 57 Stigler, George, 33, 48 Tobin, James, 158 Friedman, Milton, 190–93, 210 Nobel laureates from University of Chicago, 19, 55 Nobel laureates from English-speaking countries, 210 Nobel prize, competition for, 163 Nordhaus, William, 156–57 output, government control of, 171–72 Palgrave, Sir Robert Harry Inglis, 3 Patinkin, Don, 67, 70, 162–64 Perlman, Mark, 158, 164 Philadelphia Society, 165–66 Phillips curve, 100, 160 Phillips, A.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, Glass-Steagall Act, God and Mammon, Golden arches theory, Gordon Gekko, greed is good, Hyman Minsky, income inequality, industrial research laboratory, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, plutocrats, price stability, principal–agent problem, profit motive, proprietary trading, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

Another reason prices can diverge from fundamentals for a considerable period is that arbitrage, whereby investors simultaneously buy and sell identical or similar financial instruments which are temporarily mis-priced and thus bring prices back into line, is rarely free of risk. This was amply demonstrated by the near-collapse in 1998 of Long-Term Capital Management, a hedge fund run by former Salomon Brothers trader John Meriwether, which counted two distinguished finance academics, Robert Merton and Myron Scholes, on its strength. LTCM used complex mathematical models to exploit minute divergences in the relative value of different bonds. It was betting on the idea that the valuations would inevitably converge by buying the underpriced security and selling the overpriced security in the hope of making a small margin on the trade when convergence took place.

Chilton 1 railway mania (Britain 1840s) 1 Rajan, Raghuram 1, 2, 3, 4 Rand, Ayn 1, 2 Raphael 1 Reading, Brian 1, 2, 3, 4 Reagan, Ronald 1, 2, 3, 4, 5 Reformation 1, 2 regulators 1 regulatory arbitrage 1 Renaissance 1, 2, 3 Republic (Plato) 1, 2 retail banking 1 Reynolds, Joshua 1, 2 Ricardo, David 1 Richelieu, Cardinal 1 Ring of the Nibelung (Wagner) 1, 2, 3 Ritblat, John 1 Roaring Twenties 1, 2 robber barons 1, 2, 3 Robinson Crusoe (Daniel Defoe) 1 Rockefeller, John D. 1, 2 rogue traders 1 Rolls-Royce 1 Roman republic 1 Roosevelt, Franklin 1 Rosenberg, Harold 1 Roseveare, Henry 1 Roubini, Nouriel 1 Rousseau, Jean-Jacques 1, 2 de Rouvroy, Claude-Henri 1 Royal Exchange (London) 1 Rubens, Peter Paul 1, 2 rural exodus 1 Ruskin, John 1, 2, 3 Saatchi, Maurice 1, 2 Samuelson, Paul 1 Sandel, Michael 1 sarakin banks (Japan) 1 Sarkozy, Nicolas 1 Sassoon, Donald 1 Satyricon (Petronius) 1 Savage, Richard 1, 2 Schama, Simon 1, 2 Schiller, Friedrich 1 Scholes, Myron 1 Schopenhauer 1 Schuman, Robert 1 Schumpeter, Joseph 1, 2, 3, 4, 5, 6, 7 Schwed, Fred 1, 2 second industrial revolution (1920s) 1 Sen, Amartya 1 separation of powers 1 Shakespeare 1, 2, 3, 4, 5, 6 shareholder activists 1 shareholder value 1 shareholders 1 Shaw, George Bernard 1 Sherman Antitrust Act (US 1890) 1 Shiller, Robert 1, 2, 3, 4 Shleifer, Andrei 1 short selling 1, 2 Siemens 1 von Siemens, Werner 1 Sinclair, Upton 1 Skidelsky, Robert 1, 2 Smith, Adam 1, 2, 3, 4, 5, 6, 7, 8 Smith, Sidney 1 Smithers, Andrew 1, 2 Smollett, Tobias 1 social democratic model 1, 2 Société Générale 1 Socrates 1 Solon 1 Sombart, Werner 1, 2 Soros, George 1, 2 Sotheby’s 1 South Sea Bubble 1, 2, 3, 4, 5, 6, 7 sovereign debt 1 sovereign debt crisis (2009) 1 Spain 1, 2, 3, 4, 5, 6 speculation 1 Spenser, Edmund 1 Stabilising an Unstable Economy (Hyman Minsky) 1 Steed, Wickham 1 Stephenson, George 1 Stevens, Wallace 1 Streeck, Wolfgang 1 subprime mortgages 1, 2, 3, 4 Sutter, John 1 Sutton, Willie 1 swarf 1 Sweden 1 Swift, Jonathan 1, 2, 3 Tale of Two Cities (Charles Dickens) 1 Taleb, Nassim Nicholas 1, 2 Talleyrand, Charles Maurice de 1 Taoism 1 tax farming 1 tax havens 1 tax revolts 1 taxation 1 Taylor, John 1 Tea Party movement 1 Tennyson, Alfred 1 Thaler, Richard 1 Thatcher, Margaret 1, 2, 3, 4, 5, 6 Theory of Moral Sentiments (Adam Smith) 1 ‘thingism’ 1 Thomas Aquinas 1, 2 Thompson, E.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

accounting loophole / creative accounting, Alan Greenspan, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, cotton gin, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, gentrification, Glass-Steagall Act, global reserve currency, Google Earth, Great Leap Forward, Guggenheim Bilbao, Gunnar Myrdal, guns versus butter model, Herbert Marcuse, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, military-industrial complex, Money creation, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, Savings and loan crisis, sharing economy, Shenzhen special economic zone , Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, subprime mortgage crisis, technological determinism, the built environment, the market place, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, Timothy McVeigh, too big to fail, trickle-down economics, urban renewal, urban sprawl, vertical integration, white flight, women in the workforce

This was the way to avoid the regulator and free the market. The traders were by the mid-1990s often highly trained mathematicians and physicists (many arriving with doctorates in those fields straight from MIT) who delighted in the complex modelling of financial markets along lines pioneered back in 1972 when Fischer Black, Myron Scholes and Robert Merton (who later became infamous for their role in the Long-term Capital Management crash and bail-out in 1998) wrote out a mathematical formula for which they earned a Nobel Prize in Economics on how to value an option. The trading identified and exploited inefficiencies in markets and spread risks but, given its entirely new patterns, this permitted manipulations galore that were extremely difficult to regulate or even to spot because they were buried in the intricate ‘black box’ mathematics of computerised over-the-counter trading programs.

.: Limits to Growth 72 meat-based diets 73, 74 Medicare 28–9, 224 Mellon, Andrew 11, 98 mercantilism 206 merchant capitalists 40 mergers 49, 50 forced 261 Merrill Lynch 12 Merton, Robert 100 methane gas 73 Mexico debt crisis (1982) 10, 19 northern Miexico’s proximity to the US market 36 peso rescue 261 privatisation of telecommunications 29 and remittances 38 standard of living 10 Mexico City 243 microcredit schemes 145–6 microeconomics 237 microenterprises 145–6 microfinance schemes 145–6 Middle East, and oil issue 77, 170, 210 militarisation 170 ‘military-industrial complex’ 91 minorities: colonisation of urban neighbourhoods 247, 248 Mitterrand, François 198 modelling of markets 262 modernism 171 monarchy 249 monetarism 237 monetisation 244 money centralised money power 49–50, 52 a form of social power 43, 44 limitlessness of 43, 47 loss of confidence in the symbols/quality of money 114 universality of 106 monoculture 186 Monopolies Commission 52 monopolisation 43, 68, 95, 113, 116, 221 Monsanto 186 Montreal Protocol (1989) 76, 187 Morgan Stanley 19 Morishima, Michio 70 Morris, William 160 mortgages annual rate of change in US mortgage debt 7 mortgage finance for housing 170 mortgage-backed bonds futures 262 mortgage-backed securities 4, 262 secondary mortgage market 173, 174 securitisation of local 42 securitisation of mortgage debt 85 subprime 49, 174 Moses, Robert 169, 171, 177 MST (Brazil) 257 multiculturalism 131, 176, 231, 238, 258 Mumbai, India anti-Muslim riots (early 1990s) 247 redevelopment 178–9 municipal budgets 5 Museum of Modern Art, New York 21 Myrdal, Gunnar 196 N Nandigram, West Bengal 180 Napoleon III, Emperor 167, 168 national debt 48 National Economic Council (US) 11, 236 national-origin quotas 14 nationalisation 2, 4, 8, 224 nationalism 55–6, 143, 194, 204 NATO 203 natural gas 188 ‘natural limits’ 47 natural resources 30, 71 natural scarcity 72, 73, 78, 80, 83, 84, 121 nature and capital 88 ‘first nature’ 184 relation to 121, 122 ‘the revenge of nature’ 185 ‘second nature’ 184, 185, 187 as a social product 188 neocolonialism 208, 212 neoliberal counter-revolution 113 neoliberalism 10, 11, 19, 66, 131, 132, 141, 172, 175, 197, 208, 218, 224, 225, 233, 237, 243, 255 Nepal: communist rule in 226 Nevada, foreclosure wave in 1 New Deal 71 ‘new economy’ (1990s) 97 New Labour 45, 255 ‘new urbanism’ movement 175 New York City 11 September 2001 attacks 41 fiscal crisis (1975) 10, 172, 261 investment banks 19, 28 New York metropolitan region 169, 196 Nicaragua 189 Niger delta 251 non-governmental organisations (NGOs) 35, 253–4 non-interventionism 10 North Africa, French import of labour from 14 North America, settlement in 145 North American Free Trade Association (NAFTA) 200 Northern Ireland emergency 247 Northern Rock 2 Norway: Nordic cris (1992) 8 nuclear power 188 O Obama, Barack 11, 27, 34, 210 Obama administration 78, 121 O’Connor, Jim 77, 78 offshoring 131 Ogoni people 251 oil cheap 76–7 differential rent on oil wells 83 futures 83, 84 a non-renewable resource 82 ‘peak oil’ 38, 73, 78, 79, 80 prices 77–8, 80, 82–3, 261 and raw materials prices 6 rents 83 United States and 76–7, 79, 121, 170, 210, 261 OPEC (Organisation of Oil-Producing Countries) 83, 84 options markets currency 262 equity values 262 unregulated 99, 100 Orange County, California bankruptcy 100, 261 Organisation for Economic Cooperation and Development (OECD) 51 organisational change 98, 101 organisational forms 47, 101, 121, 127, 134, 238 Ottoman Empire 194 ‘over the counter’ trading 24, 25 overaccumulation crises 45 ozone hole 74 ozone layer 187 P Pakistan: US involvement 210 Palley, Thomas 236 Paris ‘the city of light’ 168 epicentre of 1968 confrontations 177, 243 Haussmann’s rebuilding of 49, 167–8, 169, 171, 176 municipal budget crashes (1868) 54 Paris Commune (1871) 168, 171, 176, 225, 243, 244 Partnoy, Frank: Ubfectious Greed 25 patents 221 patent laws 95 patriarchy 104 pensions pension funds 4, 5, 245 reneging on obligations 49 Péreire brothers 49, 54, 98, 174 pesticides 185, 186, 187 petty bourgeois 56 pharmaceutical sector 129, 245 philanthropy 44 Philippines: excessive urban development 8 Phillips, Kevin 206 Pinochet, General Augusto 15, 64 plant 58 Poland, lending to 19 political parties, radical 255–6 politics capitalist 76 class 62 co-revolutionary 241 commodified 219 depoliticised 219 energy 77 identity 131 labour organizing 255 left 255 transformative 207 pollution air 77 oceanic 74 rights 21 ‘Ponts et Chaussées’ organisation 92 Ponzi schemes 21, 114, 245, 246 pop music 245–6 Pope, Alexander 156 population growth 59, 72, 74, 121, 167 and capital accumulation 144–7 populism 55–6 portfolio insurance 262 poverty and capitalism 72 criminalisation and incarceration of the poor 15 feminisation of 15, 258 ‘Great Society’ anti-poverty programmes 32 Prague 243 prices commodity 37, 73 energy 78 food grain 79–80 land 8, 9, 182–3 oil 8, 28, 37–8, 77–8, 80, 82–3, 261 property 4, 182–3 raw material 37 reserve price 81–2 rising 73 share 7 primitive accumulation 58, 63–4, 108, 249 private consortia 50 private equity groups 50 private property and radical egalitarianism 233, 234 see also property markets; property rights; property values privatisation 10, 28, 29, 49, 251, 256, 257 pro-natal policies 59 production expansion of 112, 113 inadequate means of 47 investment in 114 liberating the concept 87 low-profit 29 offshore 16 production of urbanisation 87 reorganisation and relocation of 33 revolutionising of 89 surplus 45 technologies 101 productivity agreements 14, 60, 96 agricultural 119 cotton industry 67 gains 88, 89 Japan and West Germany 33 rising 96, 186 products development 95 innovation 95 new lines 94, 95 niches 94 profit squeeze 65, 66, 116 profitability constrains 30 falling 94, 131 of the financial sector 51 and wages 60 profits easy 15 excess 81, 90 falling 29, 72, 94, 116, 117 privatising 10 rates 70, 94, 101 realisation of 108 proletarianisation 60, 62 property markets crash in US and UK (1973–75) 8, 171–2, 261 overextension in 85 property market-led Nordic and Japanese bank crises 261 property-led crises (2007–10) 10, 261 real estate bubble 261 recession in UK (after 1987) 261 property rights 69, 81–2, 90, 122, 179, 198, 233, 244, 245 Property Share Price Index (UK) 7 property values 171, 181, 197, 248 prostitution 15 protectionism 31, 33, 43, 211 punctuated equilibrium theory of natural evolution 130 Putin, Vladimir 29, 80 Q Q’ing dynasty 194 quotas 16 R R&D (research and development) 92, 95–6 race issues 104 racism 61, 258 radical egalitarianism 230–34 railroads 42, 49, 191 Railwan, rise of (1970s) 35 rare earth metals 188 raw materials 6, 16, 37, 58, 77, 101, 113, 140, 144, 234 RBS 20 Reagan, Ronald 15, 64, 131, 141 Reagan-Thatcher counter revolution (early 1980s) 71 Reagan administration 1, 19 Reagan recession (1980–82) 60, 261 Real Estate Investment Trusts (US) 7 recession 1970s 171–2 language of 27 Reagan (1980–82) 60, 261 Red Brigade 254 reforestation 184 refrigeration 74 reinvestment 43, 45, 66–7, 110–12, 116 religious fundamentalism 203 religious issues 104 remittances 38, 140, 147 rentiers 40 rents differential rent 81, 82, 83 on intellectual property rights 221 land 182 monetisation of 48, 109 monopoly 51, 81–2, 83 oil 83 on patents 221 rising 181 reproduction schemas 70 Republican Party (US) 11, 141 reserve price 81 resource values 234 Ricardo, David 72, 94 risks, socialising 10 robbery 44 Robinson, Joan 238 robotisation 14, 136 Rockefeller, John D. 98 Rockefeller brothers 131 Rockefeller foundation 44, 186 Roman Empire 194 Roosevelt, Franklin D. 71 Rothschild family 98, 163 Royal Society 91, 156 royalties 40 Rubin, Robert 98 ‘rule of experts’ 99, 100–101 Russia bankruptcy (1998) 246, 261 capital flight crisis 261 defaults on its debt (1998) 6 oil and natural gas flow to Ukraine 68 oil production 6 oligarchs 29 see also Soviet Union S Saddam Hussein 210 Saint-Simon, Claude Henri de Rouvroy, Comte de 49 Saint-Simonians 87, 168 Salomon Brothers 24 Samuelson, Robert 235, 239 Sandino, Augusto 189 Sanford, Charles 98 satellites 156 savings 140 Scholes, Myron 100 Schumer, Charles 11 Schumpeter, Joseph 46 Seattle battle of (1999) 38, 227 general strike (1918) 243 software development in 195 Second World War 32, 168–70, 214 sectarianism 252 securitisation 17, 36, 42 Sejong, South Korea 124–6 service industries 41 sexism 61 sexual preferences issues 104, 131, 176 Shanghai Commune (1967) 243 shark hunting 73, 76 Shell Oil 79, 251 Shenzhen, China 36 shop floor organisers (shop stewards) 103 Silicon Valley 162, 195, 216 Singapore follows Japanese model 92 industrialisation 68 rise of (1970s) 35 slavery 144 domestic 15 slums 16, 151–2, 176, 178–9 small operators, dispossession of 50 Smith, Adam 90, 164 The Wealth of Nations 35 social democracy 255 ‘social democratic’ consensus (1960s) 64 social inequality 224 social relations 101, 102, 104, 105, 119, 121, 122, 123, 126, 127, 135–9, 152, 240 loss of 246 social security 224 social services 256 social struggles 193 social welfarism 255 socialism 136, 223, 228, 242, 249 compared with communism 224 solidarity economy 151, 254 Soros, George 44, 98, 221 Soros foundation 44 South Korea Asian Currency Crisis 261 excessive urban development 8 falling exports 6 follows Japanese model 92 rise of (1970s) 35 south-east Asia: crash of 1997–8 6, 8, 49, 246 Soviet Union in alliance with US against fascism 169 break-up of 208, 217, 227 collapse of communism 16 collectivisation of agriculture 250 ‘space race’ (1960s and 1970s) 156 see also Russia space domination of 156–8, 207 fixed spaces 190 ‘space race’ (1960s and 1970s) 156 Spain property-led crisis (2007–10) 5–6, 261 unemployment 6 spatial monopoly 164–5 special drawing rights 32, 34 special economic zones 36 special investment vehicles 36, 262 special purpose entities 262 speculation 52–3 speculative binges 52 speed-up 41, 42 stagflation 113 stagnation 116 Stalin, Joseph 136, 250 Standard Oil 98 state formation 196, 197, 202 state-corporate nexus 204 ‘space race’ (1960s and 1970s) 156 state-finance nexus 204, 205, 237, 256 blind belief in its corrective powers 55 ‘central nervous system’ for capital accumulation 54 characteristics of a feudal institution 55 and the current crisis 118 defined 48 failure of 56–7 forms of 55 fusion of state and financial powers 115 innovation in 85 international version of 51 overwhelmed by centralised credit power 52 pressure on 54 radical reconstruction of 131 role of 51 and state-corporate research nexus 97 suburbanisation 171 tilts to favour particular interests 56 statistical arbitrage strategies 262 steam engine, invention of 78, 89 Stiglitz, Joseph 45 stimulus packages 261 stock markets crash (1929) 211, 217 crashes (2001–02) 261 massive liquidity injections (1987) 236, 261 Stockton, California 2 ’structural adjustment’ programmes vii, 19, 261 subcontracting 131 subprime loans 1 subprime mortgage crisis 2 substance abuse 151 suburbanisation 73, 74, 76–7, 106–7, 169, 170, 171, 181 Summers, Larry 11, 44–5, 236 supermarket chains 50 supply-side theory 237 surveillance 92, 204 swaps credit 21 Credit Default 24, 262 currency 262 equity index 262 interest rate 24, 262 Sweden banking system crash (1992) 8, 45 Nordic crisis 8 Yugoslav immigrants 14 Sweezey, Paul 52, 113 ‘switching crises’ 93 systematic ‘moral hazard’ 10 systemic risks vii T Taipei: computer chips and household technologies in 195 Taiwan falling exports 6 follows Japanese model 92 takeovers 49 Taliban 226 tariffs 16 taxation 244 favouring the rich 45 inheritance 44 progressive 44 and the state 48, 145 strong tax base 149 tax rebates 107 tax revenues 40 weak tax base 150 ‘Teamsters for Turtles’ logo 55 technological dynamism 134 technologies change/innovation/new 33, 34, 63, 67, 70, 96–7, 98, 101, 103, 121, 127, 134, 188, 193, 221, 249 electronic 131–2 ‘green’ 188, 221 inappropriate 47 labour fights new technologies 60 labour-saving 14–15, 60, 116 ‘rule of experts’ 99, 100–101 technological comparative edge 95 transport 62 tectonic movements 75 territorial associations 193–4, 195, 196 territorial logic 204–5 Thailand Asian Currency Crisis 261 excessive urban development 8 Thatcher, Margaret, Baroness 15, 38, 64, 131, 197, 255 Thatcherites 224 ‘Third Italy’, Bologna 162, 195 time-space compression 158 time-space configurations 190 Toys ‘R’ Us 17 trade barriers to 16 collapses in foreign trade (2007–10) 261 fall in global international trade 6 increase in volume of trading 262 trade wars 211 trade unions 63 productivity agreements 60 and US auto industry 56 trafficking human 44 illegal 43 training 59 transport costs 164 innovations 42, 93 systems 16, 67 technology 62 Treasury Bill futures 262 Treasury bond futures 262 Treasury instruments 262 TRIPS agreement 245 Tronti, Mario 102 Trotskyists 253, 255 Tucuman uprising (1969) 243 Turin: communal ‘houses of the people’ 243 Turin Workers Councils 243 U UBS 20 Ukraine, Russian oil and natural gas flow to 68 ultraviolet radiation 187 UN Declaration of Human Rights 234 UN development report (1996) 110 Un-American Activities Committee hearings 169 underconsumptionist traditions 116 unemployment 131, 150 benefits 60 creation of 15 in the European Union 140 job losses 93 lay-offs 60 mass 6, 66, 261 rising 15, 37, 113 and technological change 14, 60, 93 in US 5, 6, 60, 168, 215, 261 unionisation 103, 107 United Fruit Company 189 United Kingdom economy in serious difficulty 5 forced to nationalise Northern Rock 2 property market crash 261 real average earnings 13 train network 28 United Nations 31, 208 United States agricultural subsidies 79 in alliance with Soviet Union against fascism 169 anti-trust legislation 52 auto industry 56 blockbusting neighbourhoods 248 booming but debt-filled consumer markets 141 and capital surplus absorption 31–2 competition in labour markets 61 constraints to excessive concentration of money power 44–5 consumerism 109 conumer debt service ratio 18 cross-border leasing with Germany 142–3 debt 158, 206 debt bubble 18 fiscal crises of federal, state and local governments 261 health care 28–9 heavy losses in derivatives 261 home ownership 3 housing foreclosure crises 1–2, 4, 38, 166 industries dependent on trade seriously hit 141 interventionism in Iraq and Afghanistan 210 investment bankers rescued 261 investment failures in real estate 261 lack of belief in theory of evolution 129 land speculation scheme 187–8 oil issue 76–7, 79, 80, 121, 170, 210, 261 population growth 146 proletarianisation 60 property-led crisis (2007–10) 261 pursuit of science and technology 129 radical anti-authoritarianism 199 Reagan Recession 261 rescue of financial institutions 261 research universities 95 the reversing origins of US corporate profits (1950–2004) 22 the right to the city movement 257 ‘right to work’ states 65 savings and loan crisis (1984–92) 8 secondary mortgage market 173 ‘space race’ (1960s and 1970s) 156 suburbs 106–7, 149–50, 170 train network 28 unemployment 5, 6, 60, 168, 215, 261 unrestricted capitalist development 113 value of US stocks and homes, as a percentage of GDP 22 and Vietnam War 171 wages 13, 62 welfare provision 141 ‘urban crisis’ (1960s) 170 urban ‘heat islands’ 77 urban imagineering 193 urban social movements 180 urbanisation 74, 85, 87, 119, 131, 137, 166, 167, 172–3, 174, 240, 243 US Congress 5, 169, 187–8 US Declaration of Independence 199 US National Intelligence Council 34–5 US Senate 79 US Supreme Court 179 US Treasury and Goldman Sachs 11 rescue of Continental Illinois Bank 261 V Vanderbilt family 98 Vatican 44 Veblen, Thorstein 181–2 Venezuela 256 oil production 6 Vietnam War 32, 171 Volcker, Paul 2, 236 Volcker interest rate shock 261 W wage goods 70, 107, 112, 162 wages and living standards 89 a living wage 63 national minimum wage 63 rates 13, 14, 59–64, 66, 109 real 107 repression 12, 16, 21, 107, 110, 118, 131, 172 stagnation 15 wage bargaining 63 Wal-Mart 17, 29, 64, 89 Wall Street, New York 35, 162, 200, 219, 220 banking institutions 11 bonuses 2 ‘Party of Wall Street’ 11, 20, 200 ‘War on Terror’ 34, 92 warfare 202, 204 Wasserstein, Bruce 98 waste disposal 143 Watt, James 89 wealth accumulation by capitalist class interests 12 centralisation of 10 declining 131 flow of 35 wealth transfer 109–10 weather systems 153–4 Weather Underground 254 Weill, Sandy 98 Welch, Jack 98 Westphalia, Treaty of (1648) 91 Whitehead, Alfred North 75 Wilson, Harold 56 wind turbines 188 women domestic slavery 15 mobilisation of 59, 60 prostitution 15 rights 176, 251, 258 wages 62 workers’ collectives 234 working hours 59 World Bank 36, 51, 69, 192, 200, 251 ‘Fifty Years is Enough’ campaign 55 predicts negative growth in the global economy 6 World Bank Development Report (2009) 26 World Trade Organisation (WTO) 200, 227 agreements 69 street protests against (Seattle, 1999) 55 TRIPS agreement 245 and US agricultural subsidies 79 WorldCom 8, 100, 261 worldwide web 42 Wriston, Walter 19 X X-rays 99 Y Yugoslavia dissolution of 208 ethnic cleansings 247 Z Zapatista revolutionary movement 207, 226, 252 Zola, Émile 53 The Belly of Paris 168 The Ladies’ Paradise 168


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, book value, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, fear index, financial engineering, fixed income, Glass-Steagall Act, implied volatility, index fund, intangible asset, interest rate swap, inventory management, inverted yield curve, junk bonds, London Interbank Offered Rate, low interest rates, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk free rate, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, short squeeze, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option’s strike price, and the time to the option’s expiration. Also known as the Black-Scholes-Merton Model. Investopedia explains Black Scholes Model The Black Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton, and Myron Scholes and is used widely today and regarded as one of the best formulas for determining option prices. Related Terms: • Exercise • Standard Deviation • Strike Price • Option • Stock Option 24 The Investopedia Guide to Wall Speak Blue-Chip Stock What Does Blue-Chip Stock Mean? The stock of a well-established and financially sound company that has demonstrated an ability to pay dividends in both good and bad times.

See Return on investment (ROI) RONA. See Return on net assets (RONA) ROS. See Return on sales (ROS) Roth IRA, 137-138, 261, 302 RSI. See Relative strength index (RSI) R-squared, 9, 261-262 Run rate, 262 Sale(s), 199, 210-211, 257, 270. See also Revenue; Short (short position) Sales charge. See Load fund Scholes, Myron, 23 Scrip issue. See Stock split SEC. See Securities and Exchange Commission (SEC) Secondary market, 263-264, 282 Secondary offering, 264-265 Securities and Exchange Commission (SEC), 1, 148, 193-194, 237-238, 265, 323 Securitization, 265-266 Security, 266. See also specific topics regarding bonds, derivatives or stocks Security market line (SML), 37, 266-267 Self-regulatory organization (SRO), 104, 194-195, 218 Sell.


pages: 420 words: 94,064

The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors by Spencer Jakab

4chan, activist fund / activist shareholder / activist investor, barriers to entry, behavioural economics, Bernie Madoff, Bernie Sanders, Big Tech, bitcoin, Black Swan, book value, buy and hold, classic study, cloud computing, coronavirus, COVID-19, crowdsourcing, cryptocurrency, data science, deal flow, democratizing finance, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Everybody Ought to Be Rich, fake news, family office, financial innovation, gamification, global macro, global pandemic, Google Glasses, Google Hangouts, Gordon Gekko, Hacker News, income inequality, index fund, invisible hand, Jeff Bezos, Jim Simons, John Bogle, lockdown, Long Term Capital Management, loss aversion, Marc Andreessen, margin call, Mark Zuckerberg, market bubble, Masayoshi Son, meme stock, Menlo Park, move fast and break things, Myron Scholes, PalmPilot, passive investing, payment for order flow, Pershing Square Capital Management, pets.com, plutocrats, profit maximization, profit motive, race to the bottom, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robinhood: mobile stock trading app, Saturday Night Live, short selling, short squeeze, Silicon Valley, Silicon Valley billionaire, SoftBank, Steve Jobs, TikTok, Tony Hsieh, trickle-down economics, Vanguard fund, Vision Fund, WeWork, zero-sum game

Even though there was by then a lot less time remaining until the call options expired, the incredible volatility of the stock in the preceding weeks and GameStop’s much higher share price at the time made them far more valuable. Options, or similar instruments known as “warrants,” have been a feature of financial markets for a long time, but the formula for pricing them accurately, jointly discovered by Fischer Black, Myron Scholes, and Robert Merton, was only unveiled in a 1973 academic paper that won the latter two men the Nobel Prize in Economics in 1997 (Black had died two years earlier, and Nobel Prizes aren’t awarded posthumously). The formula, along with advances in computing power to constantly spit out the correct price, led to an explosion in options trading.

Bernstein & Company, 244 Santoli, Michael, 170 Sarbanes–Oxley Act, 42 sardines parable, 184–85 Saturday Night Live, 154 Saunders, Clarence, 78–79 Saveri, Joseph, 190 Saverin, Eduardo, 38 savings, 56, 58, 62, 69, 163, 182, 241, 256–57 see also retirement accounts and pension funds Scarface, 113 Scholes, Myron, 101, 102, 108 Schulp, Jennifer, 14 Schwab, 24, 25, 33–35, 49, 50, 59, 66, 70, 139, 200, 202, 234, 236, 245, 257, 259 Schwed, Fred, Jr., 233–34, 247, 258 Securities and Exchange Commission (SEC), 30, 34, 42, 61, 66, 83, 84, 90, 117, 120, 139, 153, 163, 167–68, 192–93, 206–8, 230, 231, 246 Robinhood’s hiring of regulators from, 239–40 Seides, Ted, 245 SentimenTrader, 227 Senvest Management, 221 Sherman, George, 224 short selling, xi, xii, 12, 72–73, 74–86, 93, 95, 106–7, 115, 119–20, 125–26, 164, 181, 217, 225, 246–47 activist, 119 bans on, 83 benefits to others from, 84–85 interest and, 76, 92, 93, 106, 108, 113, 121, 132, 133, 140, 164, 169 long-term strategies and, 81 misunderstandings about, 80–81 naked, 80 rehypothecation and, 80, 92 Tesla and, 81–82, 106, 107 short squeezes, xii, 5, 23, 39, 40, 72, 73, 75–77, 81, 107–8, 113, 126, 139, 184, 221, 247 corner in, 75 GameStop, see GameStop, GameStop short squeeze gamma, 108, 109, 132, 141, 216, 227–28 history of, 77–80 silver, 229–30 Volkswagen, 77–78, 81 see also meme stocks Shkreli, Martin, 38–39 Siegel, Robert, 50 SigFig, 257 Signal Advance, 60 Silent Road to Serfdom, The: Why Passive Investing Is Worse Than Marxism, 244 Silicon Valley, 24–26, 40–41, 154, 156, 157, 160, 168 silver, 229–30 Silverblatt, Howard, 70 Silver Lake, 225 Simons, Jim, 237 Skilling, Jeffrey, 85 Skinner, B.


The Volatility Smile by Emanuel Derman,Michael B.Miller

Albert Einstein, Asian financial crisis, Benoit Mandelbrot, Black Monday: stock market crash in 1987, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, continuous integration, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, diversified portfolio, dividend-yielding stocks, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, implied volatility, incomplete markets, law of one price, London Whale, mandelbrot fractal, market bubble, market friction, Myron Scholes, prediction markets, quantitative trading / quantitative finance, risk tolerance, riskless arbitrage, Sharpe ratio, statistical arbitrage, stochastic process, stochastic volatility, transaction costs, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

Part of the trouble is the mismatch between the model of the markets (the science) and the actual behavior of markets. When it does work, though, dynamic replication allows us to value a wide range of securities, many of which would be difficult or impossible to value otherwise. In 1973, Fischer Black and Myron Scholes, and separately Robert Merton, published papers explaining how to replicate a stock option by constructing a dynamic portfolio containing shares of the underlying stock and a riskless bond. This allowed traders to determine the value of an option based on the price of the underlying stock, the prevailing level of interest rates, and an estimate of future stock price volatility.

“Anatomy of a Meltdown: The Risk Neutral Density for the S&P 500 in the Fall of 2008.” Journal of Financial Markets 15, no. 2. Black, Fischer, Emanuel Derman, and William Toy. 1990. “A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options.” Financial Analysts Journal 46, no. 1 (January–February): 33–39. Black, Fischer, and Myron Scholes. 1973. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81:637–654. Brace, Alan, Dariusz Gatarek, and Marek Musiela. 1997. “The Market Model of Interest Rate Dynamics.” Mathematical Finance 7 (2): 127–154. Breeden, D. T., and R. H. Litzenberger. 1978. “Prices of State-Contingent Claims Implicit in Options Prices.”

., 50–51, 94, 115–116 Rebalancing, of portfolios, 71–73 Recalibration, for local volatility models, 305 Rehedging, triggered by changes in hedge ratio, 122, 123f Relative strike price, 136 Relative valuation, 11, 12 Replicating portfolios: construction of, 17 selecting appropriate securities for, 41 with state-contingent securities, 177 Replication, 13–35 accurate, and discrete hedging, 115–116 and avoidable investment risks, 25–26 and derivatives, 35 dynamic, see Dynamic replication and efficient market hypothesis, 17–18 errors in, 81–82 examples of, 27–34 with a finite number of options, 77–80 and law of quantitative finance, 13–15 limits of, 16–17 reliability of, 203 riskless bonds, 23–24 static, see Static replication and stock risks, 21–23 strong, 204 styles of, 15–16 uncertainty, risk, and return in, 18–20 valuation with, 15 of variance swaps, 64–67 of variance when volatility is stochastic, 74–75 of volatility swaps, 62–63 Return(s): binomial trees for future, 21–22 relationship between risk and, 26 in replication, 18–20 Riemann integrals, 421 Risk(s): relationship between returns and, 26 in replication, 18–20 replication and stock, 21–23 INDEX of underliers, modeling, 17–18 Riskless bonds: and correlated stocks, 31–34 replication with, 23–24 and uncorrelated stocks, 27–31 Riskless security(-ies), 23–24 Risk management, 5 Risk-neutral option pricing, 393–394 Risk-neutral probability, 177, 179–180 Risk-neutral valuation, 332–334 Ross, Stephen, 2, 33, 166 Rule of two, 261–262, 280–282 SABR (stochastic alpha, beta, rho) model, 337–344 Scenarios, identifying all possible, 15 Scholes, Myron, 16 Science, financial engineering as, 6–7 Security(-ies): pricing, with financial models, 9–10 ranking, with financial models, 10 riskless, 23–24 state-contingent, see State-contingent securities Sentiment, market influenced by, 21 Sharpe, William, 28 Sharpe-Lintner-Mossin capital asset pricing model, 33–34 Sharpe ratio: in dilution, 28–29 in diversification, 31 in hedged options, 87 in stochastic volatility models, 347–350 Shocks: effect of, 146–147 in equity indexes, 148 to individual equities, 148, 149 Short expirations: implied volatility in, 282–286 jump-diffusion smile with, 414–415 jumps effects on, 384f, 385–386 and mean-reverting volatility, 370–371 Short-term government bonds, 154n.1 Short-term skew, 305–306 Skew: arising from jumps, 384–387 and delta, 138 in equity indexes, 144 estimation of effects of, 191–194, 195f–196f, 197 Index in interest rate volatility, 151 in jump-diffusion models, 415 local volatility model’s inability to match, 305–306 of lookback options, 299–300 and moneyness, 311 and nonzero correlation, 375 of options with no implied volatility, 296 and stochastic volatility models, 355 term structure with no, 242–246 in up-and-out call, 295 in valuation of exotic options, 172–173 variance in options with no, 279–280 in volatility change patterns, 309–310 and volatility smile, 135–136 Slope: of smile, inequalities for, 158–160 and strike, 144–145 of term structure, 145–146 in volatility change patterns, 309–310 Smile models, 163–173 hedging vanilla options with, 169–171 jump-diffusion models, 168.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

Abraham Wald, Albert Einstein, Bayesian statistics, Bear Stearns, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Solow, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Yet, only if such options contracts were standardized and if a model could be developed for the pricing of options as there had been a decade earlier for securities could the options market be successful and the derivative become an efficient and effective instrument for hedging risk. The CBOT could take care of the first precedent. The team of Fischer Black and Myron Scholes would take care of the second. The young boy wonder Myron Scholes had arrived at the Sloan School at MIT in 1968, with his freshly minted PhD from the Univesity of Chicago in hand. He was strong mathematically, but he was also brilliant with computing, which made him as invaluable for the MIT faculty as he had been for the Chicago faculty.

As Jon Corzine, his former Goldman Sachs colleague and former Governor of New Jersey and Senator of the USA, and most recently as the CEO when the investment bank MF Global failed spectacularly, remembered: “Fischer Black was simply the best. Giants without arrogance are rare.”4 Myron Scholes While Fischer Black was a man of few, carefully chosen words, and had a soft-spoken nature, he nonetheless stood tall, both physically and intellectually, especially on the practitioner side of finance. However, while it was he who generated the differential equation which Myron Scholes would help solve, Scholes’ contribution to the equation, and especially its intuition, should not be underestimated. Scholes remained immersed in research and teaching at MIT until Stanford University successfully attracted him to California in 1981.

One story left to be told There remains one significant story left to be told in Myron Scholes’ life. Before the saga of Long Term Capital Management can be told, we must first describe the life, times, and theories of one final great mind in pricing theory. This page intentionally left blank Part IV Robert Merton Our last great mind in pricing theory is appropriate for a number of reasons. First, he shares an American pioneer pedigree that is common among the great quant minds in this volume. Second, he worked closely with Fischer Black and Myron Scholes to bring their idea to fruition, and then took their ideas still further.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Anthropocene, assortative mating, bank run, barriers to entry, Bear Stearns, Bernie Sanders, Black Swan, Blythe Masters, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, digital divide, diversification, Dunbar number, East Village, eat what you kill, Elon Musk, eurozone crisis, fake it until you make it, family office, financial engineering, financial repression, Gini coefficient, glass ceiling, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, Jim Simons, John Meriwether, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Roose, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, Money creation, money market fund, Myron Scholes, NetJets, Network effects, no-fly zone, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, plutocrats, Ponzi scheme, power law, public intellectual, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, rolodex, Satyajit Das, search costs, shareholder value, Sheryl Sandberg, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, subprime mortgage crisis, systems thinking, tech billionaire, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, Tyler Cowen, women in the workforce, young professional

As outlined in Roger Lowenstein’s book When the Genius Failed, Meriwether began his career at Salomon Brothers, where he had made a name for himself as the head of the enormously profitable bond arbitrage group.1 In the course of a trading scandal that implicated his subordinates, though not him, he resigned. Motivated by a desire to vindicate himself, he set out for bigger and better things and in 1994 created a hedge fund that invested on the basis of global economic trends. With his stellar reputation, two highly regarded Nobel laureates—Myron Scholes and Robert Merton—on his team, and wide-ranging contacts, he went on an aggressive global marketing tour, selling the fund as a low-risk market outperformer. LTCM’s investments were based on complex computer formulae that hardly anyone fully understood but which Meriwether and his team believed to be infallible.

See SkyBridge Alternatives Conference Samuelson, Paul, 185 Sandberg, Sheryl, 153, 155, 157 Sanford C. Bernstein, 150 Sarkozy, Nicolas, 24, 159, 177–178 Saudi Arabia, 205 Savarona, 120 Savings banks, 37 Scaramucci, Anthony, 23, 53 Scarsdale Equities, 109 Schatzalp Hotel, 115 Schmidt, Eric, 40, 114 Scholes, Myron, 208 Schumer, Chuck, 27 Schwab, Klaus background on, 93–96 Christine Lagarde and, 158 common good and, 225 at Davos, 116 digital technology and, 99 education of, 96 network power of, 95, 101 stakeholder principle of, 63 World Economic Forum and, 25, 93–96, 101. See also World Economic Forum Schwarzman, Steve background on, 59–62 Blackstone Group, xxvii, 27, 30, 53, 60–61, 79, 88, 109, 204 at charity events, 129 earnings by, 88 education of, 61 general references to, xxvii, 4, 9, 76, 109, 192 at Milken Institute conference, 192 net worth of, 88, 123 partnerships by, 79 philanthropy by, 82 power lunches by, 124 residences of, 89–92 in think tanks, 106 Schwarzman Scholars program, 103 Scotland, 212 Scowcroft, Brent, 45 Seagram Building, 124–125 SEC.


pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

Arbitrage relationships in capital and A Brief History of Asset Allocation 11 corporate markets were explored during the 1930s (forward interest rates implied in yield curve models)10 and in the 1950s (corporate dividend policy and debt policy). Similarly, cost of carry arbitrage models had long been the focal point of pricing in most futures based research. In the early 1970s Fischer Black and Myron Scholes (1973) and Merton (1973) developed a simple-to-use option pricing model based in part on arbitrage relationships between investment vehicles. Soon after, fundamental arbitrage between the relative prices of a put option (the right to sell) and a call option (the right to buy) formed a process to become known as the Put-Call Parity Model, which provided a means to explain easily the various ways options can be used to modify the underlying risk characteristics of existing portfolios.

See Modern Portfolio Theory (MPT) MSCI Emerging Markets, 257, 258 Multi-asset allocation, 70–71, 133 performance, 148, 153, 158 principal concerns, 167 Multi-factor model, 41, 42, 43, 44, 50–54 Multi-factor regression model, 51 Multivariate linear regression, 198 Mutual funds, 129 NAREIT Domestic Real Estate Index, 179 NASDAQ, 250, 251 NCREIF National Property Index (NPI), 173, 175 Non-linear payoffs, 197 Old Portfolio Theory (OPT), 3 Operational risk, 197 Opportunity cost risk, 210 Optimization models, 92–98, 200 Options, 11, 197 and return distribution, 27 and risk management, 206 trading, 12 Option theory, 10–11, 231, 238, 246 Order, definition of, 242–245 Oversight, 243–244 Parameter estimation error, 25 Peer group creation, 126–132 Performance alpha, 46–47 Performance attribution, 34 Performance evaluation, conditional, 53–54 Political risk, 197 Portfolio insurance strategy, 92, 107 Portfolio management: active versus passive, 46–47 convexity of returns, 49–50 market segment weightings, 70–71 performance comparison between aggressive and conservative, 72–73 risk based, 66 Portfolio returns: differences in aggressive and conservative management, 86–87 ranked by BarCap US Aggregate, 83 ranked by S&P 500, 81 weightings, 84–85 Portfolio risk, 11, 30–34 Portfolios: bootstrapped or resampled, 94 measuring exposure, 198 model, 102 quantitative construction models, 93 rebalancing, 15, 107, 201 return volatility, 99 292 Portfolios (Continued) risk based, 106 risk decomposition of, 202–203 tactical asset, 106 Portfolio weights, 94 Price risk, 33, 219 Private equity, 61, 65, 118, 148–153 benchmarks, 170–173, 174, 275 performance of indices, 171 return and risk performance, 151–153 returns ranked by S&P 500, 154, 172 sources of return, 151 Probability, 2, 20 Product development, 15–16 Pro forma performance, 167, 169 Protected investment strategy, 107 Pure security, 62 Purity, style, 126–132 Put-Call Parity Model, 11 Put option, 11 Put protected investment strategy, 107 Quantitative model, 102–103 Rate of return: annualized S&P 500, 93 excess break-even rate, 43–44 and risk, 197–198 Real estate, 61, 65, 129, 153–160, 176 benchmarks, 173–179, 274 comparison benchmark performance, 157 correlation with S&P 500 indices, 178, 181 international and FTSE returns, 177 prices, 155–156 return and risk performance, 156–158 sources of return, 155–156 Real estate investment companies (REITs), 155 Reallocation strategy, 103 Reasonable man theory, 60 Rebalancing, 15, 107, 201 Regression coefficients, 52 Regression model, 51, 52 Regulations, governmental, 127, 197, 244–245, 247–248 REITs (real estate investment companies), 155, 157–158, 179 Replication-based indices, 122–126, 223 Reporting bias, 192 INDEX Return and risk: of asset classes through business cycles, 251–270 characteristics of alternative investments, 61–62 characteristics of indices, 169 commodities, 162–163 differences among similar asset class benchmarks, 167–194 hedge funds, 140–143 historical attributes and strategy allocation, 66–70 historical comparisons, 71–74 managed futures, 146–148 models post-1980, 11–13 multi-factor estimation, 50–54 performance results, 66 predictability of, 95–96 private equity, 151–153 real estate, 156–158 sources in alternative investments, 134–166 and strategic asset allocation, 99 Return estimation models, 50–54 Return generating models, 46 Return intervals, 36 Returns: benchmark, 136 CISDM hedge funds, 145 commodities, 160–162 hedge funds, 139–140 and managed futures, 146 and performance of investment managers, 215 real estate, 155–156 Return to risk, 2, 18, 19 Return volatility, 61, 99 Risk, 1–2 absolute, 65 and alternative investments, 134–166 assessment, 28–30 aversion, 98, 100, 133 budgeting and asset allocation, 195–211 decomposition, 34, 202–203 determinants, 23 and expected return, 230 factor weightings, 54–55 individual vs. portfolio, 69 and liabilities, 96 management of (See Risk management) 293 Index measurements of, 20–38, 96–97 measures of exposure, 63 qualitative, 63 and rate of return, 197–198 tolerance, 89, 117–119 and tracking error, 97–98 what it is, 22–24 Risk factor sensitivity analysis, 34 Risk-free assets, 4 Risk hedge ratio, 204 Riskless rate of interest, 7 Risk management, 1–2, 3, 11, 107, 214, 247 benefits of reduction, 74 goal of, 199 models, 247 multi-factor approach to, 195–200 using futures, 203–206 using options, 206 and volatility, 200–202 Risk premia, 7, 214 Robertson, Julian, 222 Rogers International Commodity Index (RICI), 182 Roll returns, 166 Rosenberg, Barr, 10 Russell Growth, 120, 207, 251 volatility, 254, 255, 256, 257 Salomon Brothers Bond Indices, 168 Sample selection, 38 Satellite allocation, 110–133 Scholes, Myron, 11 Securities: fixed income, 12, 24, 63, 65, 272 investable, 123 pure, 62 Securities and Exchange Commission (SEC), 229 Securitization, 155 Security market line, 6 Seed capital, 153 Selection bias, 192 Semi-standard deviation, 97 Semi-variance, 30 Sensitivity, market, 74–82, 82–84, 89 Sharpe Ratio, 18, 26–28, 37, 43 Skewness, 29, 62, 97, 223 Slope of the yield curve, 101 Small minus big (SMB) factor, 45 Smoothing, 28, 175 S&P 500, 36, 37, 185 annualized rate of return, 93, 168 annualized standard deviation, 93 benchmark returns, 79, 138 CISDM CTA indices, 150 commodity benchmarks, 165 correlations with real estate indices, 175, 178, 181 correlation with Barclays Capital U.S.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, Future Shock, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, W. E. B. Du Bois, We are all Keynesians now, working-age population, Y2K, Yom Kippur War

Here again, in the nick of time, the Fed came to the rescue. The institution at risk was not an investment bank but rather a hedge fund. In 1994 an offshoot financial group from Salomon Brothers opened a hedge fund, which they called Long Term Capital Management (LTCM). They would arbitrage risks according to the financial theories of Myron Scholes and Robert Merton—who would, three years later, share the Nobel Prize in economics for “a new method to determine the value of derivatives.” Because of the impeccable reputation of its advisers, not only was LTCM able to assemble $1.25 billion in capital, it was also given, unthinkingly, carte blanche to borrow from Wall Street’s leading banking houses.

., 178n4, 183n8, 190n14 Saulnier, Raymond, 113 Save More Tomorrow, 121, 125 saving, 6, 116–30, 174, 190–92n1–26; cues for, 119–20, 128, 130; deviation from standard economics of, 122–25; framing of, 119–21, 122, 191n4; long-term consequences of, 116–18; mental accounts and, 120–21, 192n25; national impact of, 125–28, 129–30; variability of, 118–22 savings and loan (S&L) crisis, 30–33, 93, 172; cost of, 31, 86; deregulation and, 30 Sbordone, Argia, 179n9 Schank, Roger C., 51, 183n2 Schellhammer, Melanie, 181n9 Schmeidler, David, 194n32 Schnyder, Ulrich, 181n9 Scholes, Myron, 84 Schultze, Charles L., 189n1 Schumpeter, Joseph A., 62, 184n9 Schwartz, Anna Jacobson, 61, 186n7 Schwarz, Christopher, 182n23 securities, 27–29 Securities Act of 1933, 39 Securities and Exchange Commission, 33, 147 Securities Exchange Act of 1934, 39 securitized loans, 87, 90, 170 selfish behavior, 22–23 Senate Committee on Banking, Housing, and Urban Affairs, 83 Sender, Henry, 188n17 Seuss, Dr.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, Goodhart's law, Greenspan put, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, junk bonds, Kenneth Rogoff, Kickstarter, labour market flexibility, Les Trente Glorieuses, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market clearing, Martin Wolf, Minsky moment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, Suez crisis 1956, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

The collapse of Long-Term Capital Management in 1998 was a classic example of this. LTCM was a hedge fund led by a bond trader called John Meriwether who had worked at Salomon Brothers, then one of Wall Street’s leading firms. He hired a stellar team, including two Nobel prize-winning economists, Robert Merton and Myron Scholes. LTCM pursued a strategy called arbitrage, buying assets that looked artificially cheap and selling short (betting on a falling price) similar assets that looked expensive. A classic example was in the US Treasury bond market. Investors were keen to own the latest issue of the thirty-year bond because of its liquidity.

leverage leveraged buyout Lewis, Michael Liberal Democrat party (UK) Liberal Party (UK) life expectancy life-cycle theory Little Dorrit lire Live 8 concert Lloyd George, David Lombard Odier Lombard Street Research London School of Economics Long Term Capital Management longevity Louis XIV, King of France Louis XV, King of France Louvre accord Lucas, Robert Lucullus, Roman general Luxembourg Macaulay, Thomas McCarthy, Cormac Macdonald, James MacDonald, Ramsay McKinsey McNamara, Robert Madoff, Bernie Malthusian trap Mandelson, Peter Marais, Matthieu Marco Polo Mares, Arnaud Marks & Spencer Marshall, George Marshall Aid Marshalsea Prison Mauro, Paolo May, Sir George means/media of exchange Medicaid Medicare Mellon, Andrew mercantilism Merchant of Venice, The Meriwether, John Merkel, Angela Merton, Robert Mexico Mill, John Stuart Milne-Bailey, Walter Minsky, Hyman Mises, Ludwig von Mississippi Project Mitterrand, Francois Mobutu, Joseph Mongols monetarism monetary policy monetary targets money markets money supply Moody’s Moore’s Law moral hazard Morgan Stanley Morgenthau, Henry Morrison, Herbert mortgages mortgage-backed bonds Multilateral Debt Relief Initiative Napier, Russell Napoleon, emperor of France Napoleonic Wars Nasser, president of Egypt National Association of Home Builders National Association of Realtors National Association of Security Dealers Netherlands New Century New Hampshire New Jersey Newton, Sir Isaac New York Times New Zealand Nixon, Richard Norman, Montagu North Carolina Northern Ireland Northern Rock North Korea North Rhine Westphalia, Germany Norway Obama, Barack odious debt Odysseus OECD d’Orléans, duc Ottoman Empire output gap Overstone, Lord overvalued currency owner-equivalent rent Papandreou, George paper money paradox of thrift Paris club Passfield, Lord (Sidney Webb) Paulson, Hank pawnbroking pension age pension funds pensions Pepin the Short Perot, Ross Perry, Rick Persians Peter Pan Philip II, King of Spain Philip IV, King of France PIGS countries PIMCO Plaza accord Poland Ponzi, Charles Ponzi scheme population growth populism portfolio insurance Portugal pound Prasad, Eswar precious metals Price-earnings ratio primary surplus Prince, Chuck principal-agent problem printing money private equity property market protectionism Protestant work ethic public choice theory public-sector workers purchasing power parity pyramid schemes Quaintance, Lee quantitative easing (QE) Quincy, Josiah railway mania Rajan, Raghuram Rand, Ayn Reagan, Ronald real bills theory real interest rates Record, Neil Reformation, the Reichsbank Reichsmark Reid, Jim Reinhart, Carmen renminbi Rentenmark rentiers reparations Republican Party reserve currency retail price index retirement revaluation Revolutionary War Ridley, Matt Roberts, Russell Rogoff, Kenneth Romanovs Roosevelt, Franklin D. Rubin, Robert Rueff, Jacques Rumsfeld, Donald Russia Sack, Alexander St Augustine Saint-Simon, duc de Salamis (city) Santelli, Rick Sarkozy, Nicholas Saudi Arabia savings savings glut Sbrancia, Belen Schacht, Hjalmar Scholes, Myron shale gas Second Bank of the United States Second World War Securities and Exchange Commission seignorage Shakespeare, William share options Shiller, Robert short-selling silver Singapore Sloan, Alfred Smith, Adam Smith, Fred Smithers & Co Smithsonian agreement Snowden, Philip Socialist Party of Greece social security Société Générale solidus Solon of Athens Soros, George sound money South Africa South Korea South Sea bubble sovereign debt crisis Soviet Union Spain special drawing right speculation, speculators Stability and Growth pact stagnation Standard & Poor’s sterling Stewart, Jimmy Stiglitz, Joseph stock markets stop-go cycle store of value Strauss-Kahn, Dominque Strong, Benjamin sub-prime lending Suez canal crisis Suharto, President of Indonesia Sumerians supply-side reforms Supreme Court (US) Sutton, Willie Sweden Swiss franc Swiss National Bank Switzerland Sylla, Richard Taiwan Taleb, Nassim Nicholas taxpayers Taylor, John tea party (US) Temin, Peter Thackeray, William Makepeace Thailand Thatcher, Margaret third world debt crisis Tiernan, Tommy Times Square, New York tobacco as currency treasury bills treasury bonds Treaty of Versailles trente glorieuses Triana, Pablo Triffin, Robert Triffin dilemma ‘trilemma’ of currency policy Truck Act True Finn party Truman, Harry S tulip mania Turkey Turner, Adair Twain, Mark unit of account usury value-at-risk (VAR) Vanguard Vanity Fair Venice Vietnam War vigilantes, bond market Viniar, David Volcker, Paul Voltaire Wagner, Adolph Wall Street Wall Street Crash of 1929 Wal-Mart wampum Warburton, Peter Warren, George Washington consensus Weatherstone, Dennis Weimar inflation Weimar Republic Weinberg, Sidney West Germany whales’ teeth White, Harry Dexter William of Orange Wilson, Harold Wirtschaftswunder Wizard of Oz, The Wolf, Martin Women Empowering Women Woodward, Bob Woolley, Paul World Bank Wriston, Walter Xinhua agency Yale University yen yield on debt yield on shares Zambia zero interest rates Zimbabwe Zoellick, Robert Philip Coggan is the Buttonwood columnist of the Economist.


pages: 407 words: 104,622

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, blockchain, book value, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Cambridge Analytica, Carl Icahn, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, data science, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, financial engineering, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, Jim Simons, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, Michael Milken, Monty Hall problem, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, Neil Armstrong, obamacare, off-the-grid, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Bannon, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine, Two Sigma

Shaw, were commanding the full attention of investors. Founded by John Meriwether—himself a former mathematics instructor—Long-Term Capital Management also filled its ranks with professors, including Eric Rosenfeld, an MIT-trained finance PhD and computer devotee, and Harvard’s Robert C. Merton and Myron Scholes, who would become Nobel laureates. The team—mostly introverts, all intellectuals—downloaded historic bond prices, distilled overlooked relationships, and built computer models predicting future behavior. Like Renaissance, Meriwether’s group didn’t care where the overall market or even individual investments were headed.

.), 207 Morgan, Howard, 56 Morgan Stanley, 129–33, 157, 166, 211, 256 Moscow State University, 236 moving averages, 73 Muller, Peter, 256, 299 multidimensional anomalies, 273 Murdoch, Rupert, xvii Murphy, John, 96 Musk, Elon, xvii mutual funds, 161–64, 172, 309–10 My Life as a Quant (Derman), 126 NASA, 93 Nasar, Sylvia, 90 Nasdaq’s dot-com crash, 215–17, 257–58 Nash, John, 89–90 National Museum of Mathematics, 262 National Rifle Association (NRA), 275 National Security Agency (NSA), 23–24, 31, 208 National Youth Science Camp, 170 Nepal, 239, 240 Neuwirth, Lee, 25, 26, 30–31, 46 Newman, Paul, 128 news flashes, 221–22 Newton, Isaac, 27 Newton High School, 13 New York City Fire Department, 168 New York Mercantile Exchange, 58 New York Stock Exchange, 211, 212 New York Times, 31–32, 76, 99, 126, 172, 281, 282, 293 Nick Simons Institute, 240 Nobel Prize, 33, 152, 209 noncompete agreements, 133, 201, 238, 241, 252–53 nondisclosure agreements, xv–xvi, 133, 201, 238, 241, 252–53 nonrandom trading effects, 143–44 Norris, Floyd, 126 Nova Fund, 167, 188–89 number theory, 34, 69–70 Obama, Barack, 276 Ohio State University, 275 Olsen, Greg, 79–80, 96–97 One Up on Wall Street (Lynch), 163 “On the Transitivity of Holonomy Systems” (Simons), 20 Open Marriage (O’Neill), 36 origins of the universe, xviii, 287, 323–26, 350 OSHA (Occupational Safety and Health Administration), 234 Oswald Veblen Prize, 38 Owl’s Nest, 228, 275, 288–89, 295 Pacific Investment Management Company (PIMCO), 163–64, 309 PaineWebber, 155–56 pairs trade, 129–30, 272 Paloma Partners, 138 partial differential equations (PDEs), 21, 26–28 pattern analysis, 5, 24, 45, 57, 123–24 Patterson, Nick background of, 147–48 at IDA, 148 Patterson, Nick, at Renaissance, xv, 145–50, 202 Brown and Mercer, 169, 179–80, 231 departure, 238 LTCM collapse and, 212–13 recruitment of, 168–69 tech bubble, 215–17 trading models, 149–50, 153, 193, 198 Paulson, John, 263–64, 309 PDT Partners, 258, 299 peer pressure, 200 Peled, Abe, 178 Pellegrini, Paolo, 263–64 Penavic, Kresimir, 145, 153 Pence, Mike, 285 Pepsi, 129–30, 272 Perl, 155 “Piggy Basket,” 57–59 Plateau, Joseph, 27 points, 190 poker, 15, 18, 25, 29, 69, 94, 127, 163 polynomials, 93 pool operator, 86 portfolio insurance, 126 portfolio theory, 30, 92 presidential election of 2016, xviii, 279–91, 294–95, 302 presidential election of 2020, 304–5 primal therapy, 36–37 Primerica, 123 Princeton/Newport Partners, 128 Princeton University, 28, 31, 37, 82, 141 Priorities USA, 283 “Probabilistic Models for and Prediction of Stock Market Behavior” (Simons), 28–30 Procter & Gamble, 132 programming language, 155, 191–92, 233–34 p-values, 144 Qatar, 261–62 quantitative trading, 30, 39, 61, 124, 126–27, 211–12, 256, 308–15 quants, xvii, 126–27, 199, 204, 256 Quantum Fund, 164–65, 333 racism, 13–14, 278, 294, 295–96, 303 Rand, Ayn, 277 Reagan, Ronald, 65, 105 Recession of 1969–1970, 123 regression line, 83–84 Reichardt, Louis, 323 Renaissance Institutional Diversified Alpha Fund, 319 Renaissance Institutional Diversified Global Equity Fund, 319 Renaissance Institutional Equities Fund (RIEF), 246–52, 254, 255, 257–61, 264–65, 271, 284, 300, 316, 319 Renaissance Institutional Futures Fund (RIFF), 252, 265, 271 Renaissance Riviera, 227–28 Renaissance Technologies Corporation Ax and Straus establish Axcom, 78–83 Ax joins, 51–52 Ax’s departure, 102–3 Baum joins, 45–46, 49 Baum’s departure, 63–64 Berlekamp’s departure, 117–18 Brown and Mercer join, 169, 179–80 compensation, 200–201, 227, 228–29, 233 expansion into stock investing, 157–58 financial crisis of 2007–2008, 255–62, 263–64 GAM Investments, 153–54 headquarters, 186, 205 hiring and interview process, 202–3, 233 Laufer joins, 109, 141–44 Mercer and political blowback, 291–305 Mercer steps down as co-CEO, 301–2, 319 name change to, 61 nondisclosure agreements, xv–xvi, 133, 201, 238, 241, 252–53 Straus’s departure, 158 tax avoidance investigation of 2014, 226–27 “the Sheiks,” 156–57 timeline of key events, xii trading models, 138–40, 156–57, 161, 203–5, 212–13, 221–22, 272–74 Volfbeyn and Belopolsky, 238, 241, 242, 252–54 Reserve Primary Fund, 172–73 Resnik, Phil, 176 retracements, 203–4 reversion trading strategy, 95–96 Revolution Books, 133–34 Riemann hypothesis, 65 Rival, Anita, 140 Robertson, Julian, 217 Robert Wood Johnson Foundation, 249–50 Robinson, Arthur, 231, 276 Rockefeller, Nelson, 33, 71 rocket scientists, 126 Romney, Mitt, 279, 290 Rosenberg, Barr, 127 Rosenfeld, Eric, 209 Rosenshein, Joe, 16–17, 41 Rosinsky, Jacqueline, 168 Royal Bank of Bermuda, 51 Rubio, Marco, 279 Russian cryptography, 23–26, 46–49, 148 Russian financial crisis of 1998, 210 St. John Island, 240 Sandia High School, 169 Scholes, Myron, 209 Schumer, Chuck, 268–69 Schwarzenegger, Arnold, 275 Schwarzman, Stephen, 304 SCL Group, 279 script, 191–92 second order, 190 Securities and Exchange Commission, 290 Security Analysis (Graham and Dodd), 127 September 11 attacks (2001), 262–63 Sessions, Jeff, 290, 291 sexism, 168, 176–77, 207 Shaio, Victor, 21, 38–39, 40 Shannon, Claude, 90–91, 127 Sharpe, William F., 167 Sharpe ratio, 167, 218, 223–24, 245 Shaw, David, 131, 133–35, 137, 211–12 short, 131, 209, 308 short-term trading, 97, 100, 107–9 Shteyngart, Gary, 312–13 Siegel, Martin, 106 Silber, Mark, 100, 102, 201, 255, 294 Simons, Barbara Bluestein, 18–19, 20–21, 25, 34–37, 61, 159–60 Simons, Elizabeth, 20–21, 31 Simons, James, xi academic career of.


pages: 453 words: 111,010

Licence to be Bad by Jonathan Aldred

"Friedman doctrine" OR "shareholder theory", Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, availability heuristic, Ayatollah Khomeini, behavioural economics, Benoit Mandelbrot, Berlin Wall, Black Monday: stock market crash in 1987, Black Swan, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, Charles Babbage, clean water, cognitive dissonance, corporate governance, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Engelbart, Douglas Engelbart, Dr. Strangelove, Edward Snowden, fake news, Fall of the Berlin Wall, falling living standards, feminist movement, framing effect, Frederick Winslow Taylor, From Mathematics to the Technologies of Life and Death, full employment, Gary Kildall, George Akerlof, glass ceiling, Glass-Steagall Act, Herman Kahn, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jeff Bezos, John Nash: game theory, John von Neumann, Linda problem, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, meta-analysis, Mont Pelerin Society, mutually assured destruction, Myron Scholes, Nash equilibrium, Norbert Wiener, nudge unit, obamacare, offshore financial centre, Pareto efficiency, Paul Samuelson, plutocrats, positional goods, power law, precautionary principle, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, scientific management, Skinner box, Skype, Social Responsibility of Business Is to Increase Its Profits, spectrum auction, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, trickle-down economics, Vilfredo Pareto, wealth creators, zero-sum game

FIVE BLACK SWANS AND NOBEL PRIZES In the meantime, the emerging orthodoxy combined bell-curve thinking and the efficient-market hypothesis to suggest that uncertainty in financial markets could be tamed or neutered altogether. In academia, this culminated in the award of five Nobel prizes to financial economists: three in 1990 (Harry Markowitz and two others building on his work), and two more in 1997, for Robert Merton and Myron Scholes. In financial markets, the culmination of the idea that uncertainty can be neutered came with the emergence of hedge funds claiming to do just that. Merton and Scholes practised what they preached and were senior managers of the hedge fund Long-Term Capital Management. LTCM made huge profits, but its approach ignored the possibility of black swans.

objection, 107, 119–20 Friedman, Milton, 4–5, 56, 69, 84, 88, 126, 189 awarded Nobel Prize, 132 and business responsibility, 2, 152 debate with Coase at Director’s house, 50, 132 as dominant Chicago thinker, 50, 132 on fairness and justice, 60 flawed arguments of, 132–3 influence on modern economics, 131–2 and monetarism, 87, 132, 232 at Mont Pèlerin, 5, 132 rejects need for realistic assumptions, 132–3 Sheraton Hall address (December 1967), 132 ‘The Methodology of Positive Economics’ (essay, 1953), 132–3 ‘The Social Responsibility of Business is to Increase Its Profits’ (article, 1970), 2, 152 Frost, Gerald, Antony Fisher: Champion of Liberty (2002), 7* Galbraith, John Kenneth, 242–3 game theory assumptions of ‘rational behaviour’, 18, 28, 29–32, 35–8, 41–3, 70, 124 Axelrod’s law of the instrument, 41 backward induction procedure, 36–7, 38 and Cold War nuclear strategy, 18, 20, 21–2, 24, 27, 33–4, 35, 70, 73, 198 focus on consequences alone, 43 as form of zombie science, 41 and human awareness, 21–3, 24–32 and interdependence, 23 limitations of, 32, 33–4, 37–40, 41–3 minimax solution, 22 multiplicity problem, 33–4, 35–7, 38 Nash equilibrium, 22–3, 24, 25, 27–8, 33–4, 41–2 the Nash program, 25 and nature of trust, 28–31, 41 the Prisoner’s Dilemma, 26–8, 29–32, 42–3 real world as problem for, 21–2, 24–5, 29, 31–2, 37–8, 39–40, 41–3 rise of in economics, 40–41 and Russell’s Chicken, 33–4 and Schelling, 138–9 and spectrum auctions, 39–40 theory of repeated games, 29–30, 35 tit-for-tat, 30–31 and trust, 29, 30–31, 32, 41 uses of, 23–4, 34, 38–9 view of humanity as non-cooperative/distrustful, 18, 21–2, 25–32, 36–8, 41–3 Von Neumann as father of, 18, 19, 20–22, 25, 26, 28, 30, 34, 41 zero-sum games, 21–2 Gates, Bill, 221–2 Geithner, Tim, 105 gender, 127–8, 130–31, 133, 156 General Electric, 159 General Motors (GM), 215–16 George, Prince of Cambridge, 98 Glass–Steagall Act, repeal of, 194 globalization, 215, 220 Goldman Sachs, 182, 184, 192 Google, 105 Gore, Al, 39 Great Reform Act (1832), 120 greed, 1–2, 196, 197, 204, 229, 238 Greenspan, Alan, 57, 203 Gruber, Jonathan, 245 Haifa, Israel, 158, 161 Harper, ‘Baldy’, 7 Harsanyi, John, 34–5, 40 Harvard Business Review, 153 Hayek, Friedrich and Arrow’s framework, 78–9 economics as all of life, 8 and Antony Fisher, 6–7 influence on Thatcher, 6, 7 and Keynesian economics, 5–6 and legal frameworks, 7* at LSE, 4 at Mont Pèlerin, 4, 5, 6, 15 and Olson’s analysis, 104 and public choice theory, 89 rejection of incentive schemes, 156 ‘spontaneous order’ idea, 30 The Road to Serfdom (1944), 4, 5, 6, 78–9, 94 healthcare, 91–2, 93, 178, 230, 236 hedge funds, 201, 219, 243–4 Heilbroner, Robert, The Worldly Philosophers, 252 Heller, Joseph, Catch-22, 98, 107, 243–4 Helmsley, Leona, 105 hero myths, 221–3, 224 Hewlett-Packard, 159 hippie countercultural, 100 Hoffman, Abbie, Steal This Book, 100 Holmström, Bengt, 229–30 homo economicus, 9, 10, 12, 140, 156–7 and Gary Becker, 126, 129, 133, 136 and behaviour of real people, 15, 136, 144–5, 171, 172, 173, 250–51 and behavioural economics, 170, 171, 172, 255 long shadow cast by, 248 and Nudge economists, 13, 172, 173, 174–5, 177 Hooke, Robert, 223 housing market, 128–9, 196, 240–41 separate doors for poor people, 243 Hume, David, 111 Huxley, Thomas, 114 IBM, 181, 222 identity, 32, 165–6, 168, 180 Illinois, state of, 46–7 immigration, 125, 146 Impossibility Theorem, 72, 73–4, 75, 89, 97 Arrow’s assumptions, 80, 81, 82 and Duncan Black, 77–8 and free marketeers, 78–9, 82 as misunderstood and misrepresented, 76–7, 79–82 ‘paradox of voting’, 75–7 as readily solved, 76–7, 79–80 Sen’s mathematical framework, 80–81 incentives adverse effect on autonomy, 164, 165–6, 168, 169–70, 180 authority figure–autonomy contradiction, 180 and behavioural economics, 171, 175, 176–7 cash and non-cash gifts, 161–2 context and culture, 175–6 contrast with rewards and punishments, 176–7 ‘crowding in’, 176 crowding out of prior motives, 160–61, 162–3, 164, 165–6, 171, 176 impact of economists’ ideas, 156–7, 178–80 and intrinsic motivations, 158–60, 161–3, 164, 165–6, 176 and moral disengagement, 162, 163, 164, 166 morally wrong/corrupting, 168–9 origins in behaviourism, 154 and orthodox theory of motivation, 157–8, 164, 166–7, 168–70, 178–9 payments to blood donors, 162–3, 164, 169, 176 as pervasive in modern era, 155–6 respectful use of, 175, 177–8 successful, 159–60 as tools of control/power, 155–7, 158–60, 161, 164, 167, 178 Indecent Proposal (film, 1993), 168 India, 123, 175 individualism, 82, 117 and Becker, 134, 135–8 see also freedom, individual Industrial Revolution, 223 inequality and access to lifeboats, 150–51 and climate change, 207–9 correlation with low social mobility, 227–8, 243 and demand for positional goods, 239–41 and economic imperialism, 145–7, 148, 151, 207 and efficiency wages, 237–8 entrenched self-deluding justifications for, 242–3 and executive pay, 215–16, 219, 224, 228–30, 234, 238 as falling in 1940–80 period, 215, 216 Great Gatsby Curve, 227–8, 243 hero myths, 221–3, 224 increases in as self-perpetuating, 227–8, 230–31, 243 as increasing since 1970s, 2–3, 215–16, 220–21 and lower growth levels, 239 mainstream political consensus on, 216, 217, 218, 219–21 marginal productivity theory, 223–4, 228 new doctrine on taxation since 1970s, 232–5 and Pareto, 217, 218–19, 220 poverty as waste of productive capacity, 238–9 public attitudes to, 221, 226–8 rises in as not inevitable, 220, 221, 242 role of luck downplayed, 222, 224–6, 243 scale-invariant nature of, 219, 220 ‘socialism for the rich’, 230 Thatcher’s praise of, 216 and top-rate tax cuts, 231, 233–5, 239 trickle-down economics, 232–3 US and European attitudes to, 226–7 ‘you deserve what you get’ belief, 223–6, 227–8, 236, 243 innovation, 222–3, 242 Inside Job (documentary, 2010), 88 Institute of Economic Affairs, 7–8, 15, 162–3 intellectual property law, 57, 68, 236 Ishiguro, Kazuo, Never Let Me Go, 148 Jensen, Michael, 229 Journal of Law and Economics, 49 justice, 1, 55, 57–62, 125, 137 Kahn, Herman, 18, 33 Kahneman, Daniel, 170–72, 173, 179, 202–3, 212, 226 Kennedy, President John, 139–40 Keynes, John Maynard, 11, 21, 162, 186, 204 and Buchanan’s ideology, 87 dentistry comparison, 258–9, 261 on economics as moral science, 252–3 Friedman’s challenge to orthodoxy of, 132 Hayek’s view of, 5–6 massive influence of, 3–4, 5–6 on power of economic ideas, 15 and probability, 185, 186–7, 188–9, 190, 210 vision of the ideal economist, 20 General Theory (1936), 15, 188–9 Khomeini, Ayatollah, 128 Khrushchev, Nikita, 139–40, 181 Kilburn Grammar School, 48 Kildall, Gary, 222 Kissinger, Henry, 184 Knight, Frank, 185–6, 212 Krugman, Paul, 248 Kubrick, Stanley, 35*, 139 labour child labour, 124, 146 and efficiency wages, 237–8 labour-intensive services, 90, 92–3 lumpenproletariat, 237 Olson’s hostility to unions, 104 Adam Smith’s ‘division of labour’ concept, 128 Laffer, Arthur, 232–3, 234 Lancet (medical journal), 257 Larkin, Philip, 67 law and economics movement, 40, 55, 56–63, 64–7 Lazear, Edward, ‘Economic Imperialism’, 246 legal system, 7* and blame for accidents, 55, 60–61 and Chicago School, 49, 50–52, 55 and Coase Theorem, 47, 49, 50–55, 63–6 criminal responsibility, 111, 137, 152 economic imperialist view of, 137 law and economics movement, 40, 55, 56–63, 64–7 ‘mimic the market’ approach, 61–3, 65 Posner’s wealth-maximization principle, 57–63, 64–7, 137 precautionary principle, 211–12, 214 transaction costs, 51–3, 54–5, 61, 62, 63–4, 68 Lehmann Brothers, 194 Lexecon, 58, 68 Linda Problem, 202–3 LineStanding.com, 123 Little Zheng, 123, 124 Lloyd Webber, Andrew, 234–5, 236 lobbying, 7, 8, 88, 115, 123, 125, 146, 230, 231, 238 loft-insulation schemes, 172–3 logic, mathematical, 74–5 The Logic of Life (Tim Harford, 2008), 130 London School of Economics (LSE), 4, 48 Long-Term Capital Management (LTCM), 201, 257 Machiavelli, Niccoló, 89, 94 Mafia, 30 malaria treatments, 125, 149 management science, 153–4, 155 Mandelbrot, Benoît, 195, 196, 201 Mankiw, Greg, 11 marginal productivity theory, 223–4 Markowitz, Harry, 196–7, 201, 213 Marx, Karl, 11, 101, 102, 104, 111, 223 lumpenproletariat, 237 mathematics, 9–10, 17–18, 19, 21–4, 26, 247, 248, 255, 259 of 2007 financial crash, 194, 195–6 and Ken Arrow, 71, 72, 73–5, 76–7, 82–3, 97 axioms (abstract assumptions), 198 fractals (scale-invariance), 194, 195–6, 201, 219 and orthodox decision theory, 190–91, 214 Ramsey Rule on discounting, 208–9, 212 and Savage, 189–90, 193, 197, 198, 199, 205 and Schelling, 139 Sen’s framework on voting systems, 80–81 standard deviation, 182, 192, 194 and stock market statistics, 190–91, 195–6 use of for military ends, 71–2 maximizing behaviour and Becker, 129–31, 133–4, 147 and catastrophe, 211 and Coase, 47, 55, 59, 61, 63–9 economic imperialism, 124–5, 129–31, 133–4, 147, 148–9 Posner’s wealth-maximization principle, 57–63, 64–7, 137 profit-maximizing firms, 228 see also wealth-maximization principle; welfare maximization McCluskey, Kirsty, 194 McNamara, Robert, 138 median voter theorem, 77, 95–6 Merton, Robert, 201 Meucci, Antonio, 222 microeconomics, 9, 232, 259 Microsoft, 222 Miles, David, 258 Mill, John Stuart, 102, 111, 243 minimum wage, national, 96 mobility, economic and social correlation with inequality, 226–8, 243 as low in UK, 227 as low in USA, 226–7 US–Europe comparisons, 226–7 Modern Times (Chaplin film, 1936), 154 modernism, 67 Moivre, Abraham de, 193 monetarism, 87, 89, 132, 232 monopolies and cartels, 101, 102, 103–4 public sector, 48–9, 50–51, 93–4 Mont Pèlerin Society, 3–9, 13, 15, 132 Morgenstern, Oskar, 20–22, 24–5, 28, 35, 124, 129, 189, 190 Mozart, Wolfgang Amadeus, 91, 92–3 Murphy, Kevin, 229 Mussolini, Benito, 216, 219 Nash equilibrium, 22–3, 24, 25, 27–8, 33–4, 41–2 Nash, John, 17–18, 22–3, 24, 25–6, 27–8, 33–4, 41–2 awarded Nobel Prize, 34–5, 38, 39, 40 mental health problems, 25, 26, 34 National Health Service, 106, 162 ‘neoliberalism’, avoidance of term, 3* Neumann, John von ambition to make economics a science, 20–21, 24–5, 26, 35, 125, 151, 189 as Cold War warrior, 20, 26, 138 and expansion of scope of economics, 124–5 as father of game theory, 18, 19, 20–22, 25, 26, 28, 30, 34, 41 final illness and death of, 19, 34, 35, 43–4 genius of, 19–20 as inspiration for Dr Strangelove, 19 and Nash’s equilibrium, 22–3, 25, 38* simplistic view of humanity, 28 theory of decision-making, 189, 190, 203 neuroscience, 14 New Deal, US, 4, 194, 231 Newton, Isaac, 223 Newtonian mechanics, 21, 24–5 Nixon, Richard, 56, 184, 200 NORAD, Colorado Springs, 181 nuclear weapons, 18–19, 20, 22, 27, 181 and Ellsberg, 200 and game theory, 18, 20, 21–2, 24, 27, 33–4, 35, 70, 73, 198 MAD (Mutually Assured Destruction), 35, 138 and Russell’s Chicken, 33–4 and Schelling, 138, 139 Nudge economists, 13, 171–5, 177–8, 179, 180, 251 Oaten, Mark, 121 Obama, Barack, 110, 121, 157, 172, 180 Olson, Mancur, 103, 108, 109, 119–20, 122 The Logic of Collective Action (1965), 103–4 On the Waterfront (Kazan film, 1954), 165 online invisibility, 100* organs, human, trade in, 65, 123, 124, 145, 147–8 Orwell, George, Nineteen Eighty-Four, 42–3 Osborne, George, 233–4 Packard, David, 159 Paine, Tom, 243 Pareto, Vilfredo 80/20 rule’ 218 and inequality, 217, 218–19, 220 life and background of, 216–17 Pareto efficiency, 217–18, 256* Paul the octopus (World Cup predictor, 2010), 133 pensions, workplace, 172, 174 physics envy, 9, 20–21, 41, 116, 175–6, 212, 247 Piketty, Thomas, 234, 235 plastic shopping bag tax, 159–60 Plato’s Republic, 100–101, 122 political scientists and Duncan Black, 78, 95–6 Black’s median voter theorem, 95–6 Buchanan’s ideology, 84–5 crises of the 1970s, 85–6 influence of Arrow, 72, 81–2, 83 see also public choice theory; social choice theory Posner, Richard, 54, 56–63, 137 ‘mimic the market’ approach, 61–3, 65 ‘The Economics of the Baby Shortage’ (1978), 61 precautionary principle, 211–12, 214 price-fixing, 101, 102, 103–4 Princeton University, 17, 19–20 Prisoner’s Dilemma, 26–8, 29–32, 42–3 prisons, cell upgrades in, 123 privatization, 50, 54, 88, 93–4 probability, 182–4 and Keynes, 185, 186–7, 188–9, 210 Linda Problem, 202–3 modern ideas of, 184–5 Ramsey’s personal probabilities (beliefs as probabilities), 187–8, 190, 197, 198, 199, 204–5 and Savage, 190, 193, 197, 198, 199, 203, 205 ‘Truth and Probability’ (Ramsey paper), 186–8, 189, 190 see also risk and uncertainty Proceedings of the National Academy of Sciences, 22 productivity Baumol’s cost disease, 90–92, 93, 94 and efficiency wages, 237–8 improvement in labour-intensive services, 92–3 labour input, 92 protectionism, 246, 255 psychology availability heuristic, 226 behaviourism, 154–8, 237 and behavioural economics, 12, 170–71 cognitive dissonance, 113–14 and financial incentives, 156–7, 158–60, 163–4, 171 framing effects, 170–71, 259 of free-riding, 113–14, 115 intrinsic motivations, 158–60, 161–3, 164, 165–6, 176 irrational behaviour, 12, 15, 171 learning of social behaviour, 163–4 moral disengagement, 162, 163, 164, 166 motivated beliefs, 227 ‘self-command’ strategies, 140 view of in game theory, 26–31 view of in public choice theory, 85–6 and welfare maximization, 149 ‘you deserve what you get’ belief, 223–6, 227–8, 236, 243 public choice theory as consensus view, 84–5 and crises of the 1970s, 85–6 foolish voter assumption, 86–8 ‘paradox of voter turnout’, 88–9, 95–6, 115–16 partial/self-contradictory application of, 86, 87–9 ‘political overload’ argument, 85, 86–7 ‘public bad, private good’ mantra, 93–4, 97 and resistance to tax rises, 94, 241 self-fulfilling prophecies, 95–7 and selfishness, 85–6, 87–8, 89, 94, 95–7 as time-bomb waiting to explode, 85 public expenditure in 1970s and ’80s, 89 Baumol’s cost disease, 90–92, 93, 94 and Keynesian economics, 4 and public choice theory, 85–8, 89, 241 and tax rises, 241–2 public-sector monopolies, 48–9, 50–51, 93–4 Puzzle of the Harmless Torturers, 118–19 queue-jumping, 123, 124 QWERTY layout, 42 racial discrimination, 126–7, 133, 136, 140 Ramsey, Frank, 186–8, 189, 190, 205, 208 Ramsey Rule, 208–9, 212 RAND Corporation, 17, 41, 103, 138, 139 and Ken Arrow, 70–71, 72–3, 74, 75–6, 77, 78 and behaviourism, 154 and Cold War military strategy, 18, 20, 21–2, 24, 27, 33–4, 70, 73, 75–6, 141, 200, 213 and Ellsberg, 182–4, 187, 197–8, 200 and Russell’s Chicken, 33 Santa Monica offices of, 18 self-image as defender of freedom, 78 rational behaviour assumptions in game theory, 18, 28, 29–32, 35–8, 41–3, 70, 124 axioms (abstract mathematical assumptions), 198 Becker’s version of, 128–9, 135, 140, 151 behavioural economics/Nudge view of, 173, 174–5 distinction between values and tastes, 136–8 economic imperialist view of, 135, 136–8, 140, 151 and free-riding theory, 100–101, 102, 103–4, 107–8, 109–10, 115–16 and orthodox decision theory, 198, 199 public choice theory relates selfishness to, 86 term as scientific-sounding cover, 12 see also homo economicus Reader’s Digest, 5, 6 Reagan, Ronald, 2, 87–8, 89, 104, 132 election of as turning point, 6, 216, 220–21 and top-rate tax cuts, 231, 233 regulators, 1–2 Chicago view of, 40 Reinhart, Carmen, 258 religion, decline of in modern societies, 15, 185 renewable energy, 116 rent-seeking, 230, 238 ‘right to recline’, 63–4 risk and uncertainty bell curve distribution, 191–4, 195, 196–7, 201, 203–4, 257 catastrophes, 181–2, 191, 192, 201, 203–4, 211–12 delusions of quantitative ‘risk management’, 196, 213 Ellsberg’s experiment (1961), 182–4, 187, 197, 198–200 errors in conventional thinking about, 191–2, 193–4, 195–7, 204–5, 213 financial orthodoxy on risk, 196–7, 201–2 and First World War, 185 and fractals (scale-invariance), 194, 195–6, 201 hasard and fortuit, 185* ‘making sense’ of through stories, 202–3 ‘measurable’ and ‘unmeasurable’ distinction, 185–6, 187–9, 190, 210–11, 212–13 measurement in numerical terms, 181–4, 187, 189, 190–94, 196–7, 201–2, 203–5, 212–13 orthodox decision theory, 183–4, 185–6, 189–91, 193–4, 201–2, 203–5, 211, 212–14 our contemporary orthodoxy, 189–91 personal probabilities (beliefs as probabilities), 187–8, 190, 197, 198, 199, 204–5 precautionary principle, 211–12, 214 pure uncertainty, 182–3, 185–6, 187–9, 190, 197, 198–9, 210, 211, 212, 214, 251 redefined as ‘volatility’, 197, 213 the Savage orthodoxy, 190–91, 197, 198–200, 203, 205 scenario planning as crucial, 251 Taleb’s black swans, 192, 194, 201, 203–4 ‘Truth and Probability’ (Ramsey paper), 186–8, 189, 190 urge to actuarial alchemy, 190–91, 197, 201 value of human life (‘statistical lives’), 141–5, 207 see also probability Robertson, Dennis, 13–14 Robinson, Joan, 260 Rodrik, Dani, 255, 260–61 Rogoff, Ken, 258 Rothko, Mark, 4–5 Rumsfeld, Donald, 232–3 Russell, Bertrand, 33–4, 74, 97, 186, 188 Ryanair, 106 Sachs, Jeffrey, 257 Santa Monica, California, 18 Sargent, Tom, 257–8 Savage, Leonard ‘Jimmie’, 189–90, 193, 203, 205scale-invariance, 194, 195–6, 201, 219 Scandinavian countries, 103, 149 Schelling, Thomas, 35* on access to lifeboats, 150–51 awarded Nobel Prize, 138–9 and Cold War nuclear strategy, 138, 139–40 and economic imperialism, 141–5 and game theory, 138–9 and Washington–Moscow hotline, 139–40 work on value of human life, 141–5, 207 ‘The Intimate Contest for Self-command’ (essay, 1980), 140, 145 ‘The Life You Save May be Your Own’ (essay, 1968), 142–5, 207 Schiphol Airport, Amsterdam, 172 Schmidt, Eric, 105 Scholes, Myron, 201 Schwarzman, Stephen, 235 Second World War, 3, 189, 210 selfishness, 41–3, 178–9 and Becker, 129–30 and defence of inequality, 242–3 as free marketeers’ starting point, 10–12, 13–14, 41, 86, 178–9 and game theory, 18 and public choice theory, 85–6, 87–8, 89, 94, 95–7 Selten, Reinhard, 34–5, 36, 38, 40 Sen, Amartya, 29, 80–81 service sector, 90–93, 94 Shakespeare, William, Measure for Measure, 169 Shaw, George Bernard, 101 Shiller, Robert, 247 Simon, Herbert, 223 Skinner, Burrhus, 154–5, 158 Smith, Adam, 101, 111, 122 The Wealth of Nations (1776), 10–11, 188–9 snowflakes, 195 social choice theory, 72 and Ken Arrow, 71–83, 89, 95, 97, 124–5, 129 and Duncan Black, 78, 95 and free marketeers, 79, 82 Sen’s mathematical framework, 80–81 social media, 100* solar panels, 116 Solow, Bob, 163, 223 Sorites paradox, 117–18, 119 sovereign fantasy, 116–17 Soviet Union, 20, 22, 70, 73, 82, 101, 104, 167, 237 spectrum auctions, 39–40, 47, 49 Stalin, Joseph, 70, 73, 101 the state anti-government attitudes in USA, 83–5 antitrust regulation, 56–8 dismissal of almost any role for, 94, 135, 235–6, 241 duty over full employment, 5 economic imperialist arguments for ‘small government’, 135 increased economic role from 1940s, 3–4, 5 interventions over ‘inefficient’ outcomes, 53 and monetarism, 87, 89 and Mont Pèlerin Society, 3, 4, 5 and privatization, 50, 54, 88, 93–4 public-sector monopolies, 48–50, 93–4 replacing of with markets, 79 vital role of, 236 statistical lives, 141–5, 207 Stern, Nick, 206, 209–10 Stigler, George, 50, 51, 56, 69, 88 De Gustibus Non Est Disputandum (with Becker, 1977), 135–6 Stiglitz, Joseph, 237 stock markets ‘Black Monday’ (1987), 192 and fractals (scale-invariance), 194, 195–6, 201 orthodox decision theory, 190–91, 193–4, 201 Strittmatter, Father, 43–4 Summers, Larry, 10, 14 Sunstein, Cass, 173 Nudge (with Richard Thaler, 2008), 171–2, 175 Taleb, Nassim, 192 Tarski, Alfred, 74–5 taxation and Baumol’s cost disease, 94 and demand for positional goods, 239–41 as good thing, 231, 241–2, 243 Laffer curve, 232–3, 234 new doctrine of since 1970s, 232–4 property rights as interdependent with, 235–6 public resistance to tax rises, 94, 239, 241–2 and public spending, 241–2 revenue-maximizing top tax rate, 233–4, 235 tax avoidance and evasion, 99, 105–6, 112–13, 175, 215 ‘tax revolt’ campaigns (1970s USA), 87 ‘tax as theft’ culture, 235–6 top-rate cuts and inequality, 231, 233–5, 239 whines from the super-rich, 234–5, 243 Taylor, Frederick Winslow, 153–4, 155, 167, 178, 237 Thaler, Richard, 13 Nudge (with Cass Sunstein, 2008), 171–2, 175 Thatcher, Margaret, 2, 88, 89, 104, 132 election of as turning point, 6, 216, 220–21 and Hayek, 6, 7 and inequality, 216, 227 privatization programme, 93–4 and top-rate tax cuts, 231 Theory of Games and Economic Behavior (Von Neumann and Morgenstern, 1944), 20, 21, 25, 189 Titanic, sinking of (1912), 150 Titmuss, Richard, The Gift Relationship, 162–3 tobacco-industry lobbyists, 8 totalitarian regimes, 4, 82, 167–8, 216, 219 see also Soviet Union trade union movement, 104 Tragedy of the Commons, 27 Truman, Harry, 20, 237 Trump, Donald, 233 Tucker, Albert, 26–7 Tversky, Amos, 170–72, 173, 202–3, 212, 226 Twitter, 100* Uber, 257 uncertainty see risk and uncertainty The Undercover Economist (Tim Harford, 2005), 130 unemployment and Coase Theorem, 45–7, 64 during Great Depression, 3–4 and Keynesian economics, 4, 5 United Nations, 96 universities auctioning of places, 124, 149–50 incentivization as pervasive, 156 Vietnam War, 56, 198, 200, 249 Villari, Pasquale, 30 Vinci, Leonardo da, 186 Viniar, David, 182, 192 Volkswagen scandal (2016), 2, 151–2 Vonnegut, Kurt, 243–4 voting systems, 72–4, 77, 80, 97 Arrow’s ‘Independence of Irrelevant Alternatives’, 81, 82 Arrow’s ‘Universal Domain’, 81, 82 and free marketeers, 79 ‘hanging chads’ in Florida (2000), 121 recount process in UK, 121 Sen’s mathematical framework, 80–81 Waldfogel, Joel, 161* Wanniski, Jude, 232 Watertown Arsenal, Massachusetts, 153–4 Watson Jr, Thomas J., 181 wealth-maximization principle, 57–63 and Coase, 47, 55, 59, 63–9 as core principle of current economics, 253 created markets, 65–7 extension of scope of, 124–5 and justice, 55, 57–62, 137 and knee space on planes, 63–4 practical problems with negotiations, 62–3 and values more important than efficiency, 64–5, 66–7 welfare maximization, 124–5, 129–31, 133–4, 148–9, 176 behavioural economics/Nudge view of, 173 and vulnerable/powerless people, 146–7, 150 welfare state, 4, 162 Wilson, Charlie, 215 Wittgenstein, Ludwig, 186, 188 Wolfenschiessen (Swiss village), 158, 166–7 Woolf, Virginia, 67 World Bank, 96 World Cup football tournament (2010), 133 World Health Organization, 207 Yale Saturday Evening Pest, 4–5 Yellen, Janet, 237 THE BEGINNING Let the conversation begin … Follow the Penguin twitter.com/penguinukbooks Keep up-to-date with all our stories youtube.com/penguinbooks Pin ‘Penguin Books’ to your pinterest.com/penguinukbooks Like ‘Penguin Books’ on facebook.com/penguinbooks Listen to Penguin at soundcloud.com/penguin-books Find out more about the author and discover more stories like this at penguin.co.uk ALLEN LANE UK | USA | Canada | Ireland | Australia India | New Zealand | South Africa Allen Lane is part of the Penguin Random House group of companies whose addresses can be found at global.penguinrandomhouse.com First published 2019 Copyright © Jonathan Aldred, 2019 The moral right of the author has been asserted Jacket photograph © Getty Images ISBN: 978-0-241-32544-5 This ebook is copyright 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pages: 403 words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

"Friedman doctrine" OR "shareholder theory", 3D printing, Alan Greenspan, Alvin Toffler, Anthropocene, Asian financial crisis, bank run, basic income, battle of ideas, behavioural economics, benefit corporation, Berlin Wall, biodiversity loss, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Cass Sunstein, choice architecture, circular economy, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, dematerialisation, disruptive innovation, Douglas Engelbart, Douglas Engelbart, Easter island, en.wikipedia.org, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, Future Shock, Garrett Hardin, Glass-Steagall Act, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, land reform, land value tax, Landlord’s Game, loss aversion, low interest rates, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, Minsky moment, mobile money, Money creation, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, ocean acidification, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, retail therapy, Richard Thaler, Robert Solow, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, Steve Ballmer, systems thinking, TED Talk, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, Tragedy of the Commons, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

But rational economic man’s influence on our behaviour goes far beyond the classroom. A striking example was uncovered at the Chicago Board Options Exchange (CBOE) which opened in 1973 and became one of the most important financial derivatives exchanges in the world. In the same year that the Exchange opened for trading, two influential economists, Fischer Black and Myron Scholes, published what came to be known as the Black–Scholes model, which used publicly available market data to calculate the expected price of options traded in the market. At first the formula’s predictions deviated widely – by 30% to 40% – from actual market prices at the CBOE. But within a few years – and with no alterations to the model – its predicted prices differed by a mere 2% on average from actual market prices.

., 6 micro-businesses, 9, 173, 178 microeconomics, 132–4 microgrids, 187–8 Micronesia, 153 Microsoft, 231 middle class, 6, 46, 58 middle-income countries, 90, 164, 168, 173, 180, 226, 254 migration, 82, 89–90, 166, 195, 199, 236, 266, 286 Milanovic, Branko, 171 Mill, John Stuart, 33–4, 73, 97, 250, 251, 283, 284, 288 Millo, Yuval, 101 minimum wage, 82, 88, 176 Minsky, Hyman, 87, 146 Mises, Ludwig von, 66 mission zero, 217 mobile banking, 199–200 mobile phones, 222 Model T revolution, 277–8 Moldova, 199 Mombasa, Kenya, 185–6 Mona Lisa (da Vinci), 94 money creation, 87, 164, 177, 182–8, 205 MONIAC (Monetary National Income Analogue Computer), 64–5, 75, 142, 262 Monoculture (Michaels), 6 Monopoly, 149 Mont Pelerin Society, 67, 93 Moral Consequences of Economic Growth, The (Friedman), 258 moral vacancy, 41 Morgan, Mary, 99 Morogoro, Tanzania, 121 Moyo, Dambisa, 258 Muirhead, Sam, 230, 231 MultiCapital Scorecard, 241 Murphy, David, 264 Murphy, Richard, 185 musical tastes, 110 Myriad Genetics, 196 N national basic income, 177 Native Americans, 115, 116, 282 natural capital, 7, 116, 269 Natural Economic Order, The (Gessel), 274 Nedbank, 216 negative externalities, 213 negative interest rates, 275–6 neoclassical economics, 134, 135 neoliberalism, 7, 62–3, 67–70, 81, 83, 84, 88, 93, 143, 170, 176 Nepal, 181, 199 Nestlé, 217 Netherlands, 211, 235, 224, 226, 238, 277 networks, 110–11, 117, 118, 123, 124–6, 174–6 neuroscience, 12–13 New Deal, 37 New Economics Foundation, 278, 283 New Year’s Day, 124 New York, United States, 9, 41, 55 Newlight Technologies, 224, 226, 293 Newton, Isaac, 13, 15–17, 32–3, 95, 97, 129, 131, 135–7, 142, 145, 162 Nicaragua, 196 Nigeria, 164 nitrogen, 49, 52, 212–13, 216, 218, 221, 226, 298 ‘no pain, no gain’, 163, 167, 173, 204, 209 Nobel Prize, 6–7, 43, 83, 101, 167 Norway, 281 nudging, 112, 113, 114, 123–6 O Obama, Barack, 41, 92 Oberlin, Ohio, 239, 240–41 Occupy movement, 40, 91 ocean acidification, 45, 46, 52, 155, 242, 298 Ohio, United States, 190, 239 Okun, Arthur, 37 onwards and upwards, 53 Open Building Institute, 196 Open Source Circular Economy (OSCE), 229–32 open systems, 74 open-source design, 158, 196–8, 265 open-source licensing, 204 Organisation for Economic Co-operation and Development (OECD), 38, 210, 255–6, 258 Origin of Species, The (Darwin), 14 Ormerod, Paul, 110, 111 Orr, David, 239 Ostrom, Elinor, 83, 84, 158, 160, 181–2 Ostry, Jonathan, 173 OSVehicle, 231 overseas development assistance (ODA), 198–200 ownership of wealth, 177–82 Oxfam, 9, 44 Oxford University, 1, 36 ozone layer, 9, 50, 115 P Pachamama, 54, 55 Pakistan, 124 Pareto, Vilfredo, 165–6, 175 Paris, France, 290 Park 20|20, Netherlands, 224, 226 Parker Brothers, 149 Patagonia, 56 patents, 195–6, 197, 204 patient capital, 235 Paypal, 192 Pearce, Joshua, 197, 203–4 peer-to-peer networks, 187, 192, 198, 203, 292 People’s QE, 184–5 Perseus, 244 Persia, 13 Peru, 2, 105–6 Phillips, Adam, 283 Phillips, William ‘Bill’, 64–6, 75, 142, 262 phosphorus, 49, 52, 212–13, 218, 298 Physiocrats, 73 Pickett, Kate, 171 pictures, 12–25 Piketty, Thomas, 169 Playfair, William, 16 Poincaré, Henri, 109, 127–8 Polanyi, Karl, 82, 272 political economy, 33–4, 42 political funding, 91–2, 171–2 political voice, 43, 45, 51–2, 77, 117 pollution, 29, 45, 52, 85, 143, 155, 206–17, 226, 238, 242, 254, 298 population, 5, 46, 57, 155, 199, 250, 252, 254 Portugal, 211 post-growth society, 250 poverty, 5, 9, 37, 41, 50, 88, 118, 148, 151 emotional, 283 and inequality, 164–5, 168–9, 178 and overseas development assistance (ODA), 198–200 and taxation, 277 power, 91–92 pre-analytic vision, 21–2 prescription medicines, 123 price-takers, 132 prices, 81, 118–23, 131, 160 Principles of Economics (Mankiw), 34 Principles of Economics (Marshall), 17, 98 Principles of Political Economy (Mill), 288 ProComposto, 226 Propaganda (Bernays), 107 public relations, 107, 281 public spending v. investment, 276 public–private patents, 195 Putnam, Robert, 76–7 Q quantitative easing (QE), 184–5 Quebec, 281 Quesnay, François, 16, 73 R Rabot, Ghent, 236 Rancière, Romain, 172 rating and review systems, 105 rational economic man, 94–103, 109, 111, 112, 126, 282 Reagan, Ronald, 67 reciprocity, 103–6, 117, 118, 123 reflexivity of markets, 144 reinforcing feedback loops, 138–41, 148, 250, 271 relative decoupling, 259 renewable energy biomass energy, 118, 221 and circular economy, 221, 224, 226, 235, 238–9, 274 and commons, 83, 85, 185, 187–8, 192, 203, 264 geothermal energy, 221 and green growth, 257, 260, 263, 264, 267 hydropower, 118, 260, 263 pricing, 118 solar energy, see solar energy wave energy, 221 wind energy, 75, 118, 196, 202–3, 221, 233, 239, 260, 263 rentier sector, 180, 183, 184 reregulation, 82, 87, 269 resource flows, 175 resource-intensive lifestyles, 46 Rethinking Economics, 289 Reynebeau, Guy, 237 Ricardo, David, 67, 68, 73, 89, 250 Richardson, Katherine, 53 Rifkin, Jeremy, 83, 264–5 Rise and Fall of the Great Powers, The (Kennedy), 279 risk, 112, 113–14 Robbins, Lionel, 34 Robinson, James, 86 Robinson, Joan, 142 robots, 191–5, 237, 258, 278 Rockefeller Foundation, 135 Rockford, Illinois, 179–80 Rockström, Johan, 48, 55 Roddick, Anita, 232–4 Rogoff, Kenneth, 271, 280 Roman Catholic Church, 15, 19 Rombo, Tanzania, 190 Rome, Ancient, 13, 48, 154 Romney, Mitt, 92 Roosevelt, Franklin Delano, 37 rooted membership, 190 Rostow, Walt, 248–50, 254, 257, 267–70, 284 Ruddick, Will, 185 rule of thumb, 113–14 Ruskin, John, 42, 223 Russia, 200 rust belt, 90, 239 S S curve, 251–6 Sainsbury’s, 56 Samuelson, Paul, 17–21, 24–5, 38, 62–7, 70, 74, 84, 91, 92, 93, 262, 290–91 Sandel, Michael, 41, 120–21 Sanergy, 226 sanitation, 5, 51, 59 Santa Fe, California, 213 Santinagar, West Bengal, 178 São Paolo, Brazil, 281 Sarkozy, Nicolas, 43 Saumweder, Philipp, 226 Scharmer, Otto, 115 Scholes, Myron, 100–101 Schumacher, Ernst Friedrich, 42, 142 Schumpeter, Joseph, 21 Schwartz, Shalom, 107–9 Schwarzenegger, Arnold, 163, 167, 204 ‘Science and Complexity’ (Weaver), 136 Scotland, 57 Seaman, David, 187 Seattle, Washington, 217 second machine age, 258 Second World War (1939–45), 18, 37, 70, 170 secular stagnation, 256 self-interest, 28, 68, 96–7, 99–100, 102–3 Selfish Society, The (Gerhardt), 283 Sen, Amartya, 43 Shakespeare, William, 61–3, 67, 93 shale gas, 264, 269 Shang Dynasty, 48 shareholders, 82, 88, 189, 191, 227, 234, 273, 292 sharing economy, 264 Sheraton Hotel, Boston, 3 Siegen, Germany, 290 Silicon Valley, 231 Simon, Julian, 70 Sinclair, Upton, 255 Sismondi, Jean, 42 slavery, 33, 77, 161 Slovenia, 177 Small Is Beautiful (Schumacher), 42 smart phones, 85 Smith, Adam, 33, 57, 67, 68, 73, 78–9, 81, 96–7, 103–4, 128, 133, 160, 181, 250 social capital, 76–7, 122, 125, 172 social contract, 120, 125 social foundation, 10, 11, 44, 45, 49, 51, 58, 77, 174, 200, 254, 295–6 social media, 83, 281 Social Progress Index, 280 social pyramid, 166 society, 76–7 solar energy, 59, 75, 111, 118, 187–8, 190 circular economy, 221, 222, 223, 224, 226–7, 239 commons, 203 zero-energy buildings, 217 zero-marginal-cost revolution, 84 Solow, Robert, 135, 150, 262–3 Soros, George, 144 South Africa, 56, 177, 214, 216 South Korea, 90, 168 South Sea Bubble (1720), 145 Soviet Union (1922–91), 37, 67, 161, 279 Spain, 211, 238, 256 Spirit Level, The (Wilkinson & Pickett), 171 Sraffa, Piero, 148 St Gallen, Switzerland, 186 Stages of Economic Growth, The (Rostow), 248–50, 254 stakeholder finance, 190 Standish, Russell, 147 state, 28, 33, 69–70, 78, 82, 160, 176, 180, 182–4, 188 and commons, 85, 93, 197, 237 and market, 84–6, 200, 281 partner state, 197, 237–9 and robots, 195 stationary state, 250 Steffen, Will, 46, 48 Sterman, John, 66, 143, 152–4 Steuart, James, 33 Stiglitz, Joseph, 43, 111, 196 stocks and flows, 138–41, 143, 144, 152 sub-prime mortgages, 141 Success to the Successful, 148, 149, 151, 166 Sugarscape, 150–51 Summers, Larry, 256 Sumner, Andy, 165 Sundrop Farms, 224–6 Sunstein, Cass, 112 supply and demand, 28, 132–6, 143, 253 supply chains, 10 Sweden, 6, 255, 275, 281 swishing, 264 Switzerland, 42, 66, 80, 131, 186–7, 275 T Tableau économique (Quesnay), 16 tabula rasa, 20, 25, 63, 291 takarangi, 54 Tanzania, 121, 190, 202 tar sands, 264, 269 taxation, 78, 111, 165, 170, 176, 177, 237–8, 276–9 annual wealth tax, 200 environment, 213–14, 215 global carbon tax, 201 global financial transactions tax, 201, 235 land-value tax, 73, 149, 180 non-renewable resources, 193, 237–8, 278–9 People’s QE, 185 tax relief v. tax justice, 23, 276–7 TED (Technology, Entertainment, Design), 202, 258 Tempest, The (Shakespeare), 61, 63, 93 Texas, United States, 120 Thailand, 90, 200 Thaler, Richard, 112 Thatcher, Margaret, 67, 69, 76 Theory of Moral Sentiments (Smith), 96 Thompson, Edward Palmer, 180 3D printing, 83–4, 192, 198, 231, 264 thriving-in-balance, 54–7, 62 tiered pricing, 213–14 Tigray, Ethiopia, 226 time banking, 186 Titmuss, Richard, 118–19 Toffler, Alvin, 12, 80 Togo, 231, 292 Torekes, 236–7 Torras, Mariano, 209 Torvalds, Linus, 231 trade, 62, 68–9, 70, 89–90 trade unions, 82, 176, 189 trademarks, 195, 204 Transatlantic Trade and Investment Partnership (TTIP), 92 transport, 59 trickle-down economics, 111, 170 Triodos, 235 Turkey, 200 Tversky, Amos, 111 Twain, Mark, 178–9 U Uganda, 118, 125 Ulanowicz, Robert, 175 Ultimatum Game, 105, 117 unemployment, 36, 37, 276, 277–9 United Kingdom Big Bang (1986), 87 blood donation, 118 carbon dioxide emissions, 260 free trade, 90 global material footprints, 211 money creation, 182 MONIAC (Monetary National Income Analogue Computer), 64–5, 75, 142, 262 New Economics Foundation, 278, 283 poverty, 165, 166 prescription medicines, 123 wages, 188 United Nations, 55, 198, 204, 255, 258, 279 G77 bloc, 55 Human Development Index, 9, 279 Sustainable Development Goals, 24, 45 United States American Economic Association meeting (2015), 3 blood donation, 118 carbon dioxide emissions, 260 Congress, 36 Council of Economic Advisers, 6, 37 Earning by Learning, 120 Econ 101 course, 8, 77 Exxon Valdez oil spill (1989), 9 Federal Reserve, 87, 145, 146, 271, 282 free trade, 90 Glass–Steagall Act (1933), 87 greenhouse gas emissions, 153 global material footprint, 211 gross national product (GNP), 36–40 inequality, 170, 171 land-value tax, 73, 149, 180 political funding, 91–2, 171 poverty, 165, 166 productivity and employment, 193 rust belt, 90, 239 Transatlantic Trade and Investment Partnership (TTIP), 92 wages, 188 universal basic income, 200 University of Berkeley, 116 University of Denver, 160 urbanisation, 58–9 utility, 35, 98, 133 V values, 6, 23, 34, 35, 42, 117, 118, 121, 123–6 altruism, 100, 104 anthropocentric, 115 extrinsic, 115 fluid, 28, 102, 106–9 and networks, 110–11, 117, 118, 123, 124–6 and nudging, 112, 113, 114, 123–6 and pricing, 81, 120–23 Veblen, Thorstein, 82, 109, 111, 142 Venice, 195 verbal framing, 23 Verhulst, Pierre, 252 Victor, Peter, 270 Viner, Jacob, 34 virtuous cycles, 138, 148 visual framing, 23 Vitruvian Man, 13–14 Volkswagen, 215–16 W Wacharia, John, 186 Wall Street, 149, 234, 273 Wallich, Henry, 282 Walras, Léon, 131, 132, 133–4, 137 Ward, Barbara, 53 Warr, Benjamin, 263 water, 5, 9, 45, 46, 51, 54, 59, 79, 213–14 wave energy, 221 Ways of Seeing (Berger), 12, 281 Wealth of Nations, The (Smith), 74, 78, 96, 104 wealth ownership, 177–82 Weaver, Warren, 135–6 weightless economy, 261–2 WEIRD (Western, educated, industrialised, rich, democratic), 103–5, 110, 112, 115, 117, 282 West Bengal, India, 124, 178 West, Darrell, 171–2 wetlands, 7 whale hunting, 106 Wiedmann, Tommy, 210 Wikipedia, 82, 223 Wilkinson, Richard, 171 win–win trade, 62, 68, 89 wind energy, 75, 118, 196, 202–3, 221, 233, 239, 260, 263 Wizard of Oz, The, 241 Woelab, 231, 293 Wolf, Martin, 183, 266 women’s rights, 33, 57, 107, 160, 201 and core economy, 69, 79–81 education, 57, 124, 178, 198 and land ownership, 178 see also gender equality workers’ rights, 88, 91, 269 World 3 model, 154–5 World Bank, 6, 41, 119, 164, 168, 171, 206, 255, 258 World No Tobacco Day, 124 World Trade Organization, 6, 89 worldview, 22, 54, 115 X xenophobia, 266, 277, 286 Xenophon, 4, 32, 56–7, 160 Y Yandle, Bruce, 208 Yang, Yuan, 1–3, 289–90 yin yang, 54 Yousafzai, Malala, 124 YouTube, 192 Yunnan, China, 56 Z Zambia, 10 Zanzibar, 9 Zara, 276 Zeitvorsoge, 186–7 zero environmental impact, 217–18, 238, 241 zero-hour contracts, 88 zero-humans-required production, 192 zero-interest loans, 183 zero-marginal-cost revolution, 84, 191, 264 zero-waste manufacturing, 227 Zinn, Howard, 77 PICTURE ACKNOWLEDGEMENTS Illustrations are reproduced by kind permission of: archive.org


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

"World Economic Forum" Davos, Alan Greenspan, algorithmic trading, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial engineering, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, Glass-Steagall Act, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, junk bonds, Kenneth Rogoff, large denomination, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Menlo Park, Michael Milken, military-industrial complex, Minsky moment, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Ponzi scheme, profit maximization, prosperity theology / prosperity gospel / gospel of success, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, shareholder value, short selling, sovereign wealth fund, stock buybacks, subprime mortgage crisis, The Chicago School, Thomas Malthus, too big to fail, trade route

Currency trading and foreign exchange markets boomed, with currency futures launching in 1972, and foreign exchange in one form or another growing into the world’s largest financial market. The extent to which financial firms and markets were rapidly computerizing was likewise essential to this kind of trading, and together with the pioneering work of Fischer Black and Myron Scholes in options theory in 1973, the elements of primordial soup were set for a new hedging and speculative universe, one that supported so-called derivative instruments. The first two introduced were foreign currency futures in 1972 and equity futures in 1973; T-bill futures and futures on mortgage-backed bonds followed in 1975.

Roosevelt, Theodore Rosenberg, David Rove, Karl Royal Dutch Shell see also Shell Rubenstein, David Rubin, Robert ruble, Russian Ruskin, Alan Russia capitalism of currency policy of oil policy of oil production oil reserves of petro-diplomacy of Russian Export Blend Crude Oil (REBCO) Ryan, Timothy SAC Capital Partners S&L crisis S&P/Case-Shiller Home Price Index S&P Sarkozy, Nicolas Saudi Arabia China’s arms sales to U.S. currency and U.S.’s economic relationship with Saudi Aramco Saut, Jeff Say, Jean-Baptiste Schama, Simon Schiff, Peter Schlesinger, Arthur Schlesinger, James Scholes, Myron Schumer, Charles Schumpeter, Joseph Schwartz, Anna Scott, Walter Secret, The (Byrne) “Securities: The New World Wealth Machine” (Edmunds) Securities and Exchange Commission securitization CDOs and defined deregulation and derivatives and entrepreneurialism and family income and federal mortgage enterprises and hedge funds and housing and mortgage crisis and opacity and principal categories of pseudomonetary products and rating services and risk burden and shadow banking system and Three-M conundrum and Senate, U.S.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

The brainchild of John Meriwether, former head of bond trading at Salomon Brothers, LTCM was launched in February 1994 with $1.25 billion in capital and a cadre of hotshots who built financial models that would take bond arbitrage to never-before-seen heights of profitability. Meriwether hired PhD economists David Mullins, former vice chairman of the Federal Reserve, and Robert C. Merton and Myron Scholes, two academics who would share the 1997 Nobel Prize in Economics for creating a new method to value derivatives. (This unusual trio should have been investors’ first red flag.) By 1996, LTCM’s model-driven investments had proven phenomenally successful. The partners of the firm earned reputations as arrogant, conceited, and secretive, hiding their trades by scattering them among different banks so competitors couldn’t replicate their strategies.

., 93–95, 167 Ranieri, Lew, 16 Raskin, Sarah Bloom, 194 Rattner, Steve, 146 Reagan, Ronald, 104, 220 regulatory capture, 258 rehypothecation, 127–28 renters, 215 repo market, 108, 124, 126–29 Requiem for the American Dream (Chomsky), 9 Reserve Management Company, 140 Reserve Primary Fund, 140–41 Richards, James, 97 “Rise and Fall of Subprime Mortgages, The” (Duca & DiMartino Booth), 74 “Rise and Fall of the Shadow Banking System” (Pozsar), 121 risk management, 255–56 Ritholtz, Barry, 222 Roach, Steve, 227 Roche, Cullen, 198 Rogoff, Ken, 82 Romney, Mitt, 223 Roosa, Robert, 61–62 Rosenblum, Harvey, 55, 59–65, 72–73, 82, 91, 93, 163, 165, 178–79, 185, 244–45 Bernanke and, 83–84 DiMartino Booth and, 30–32, 117, 183, 201, 202, 204, 221, 222 Yellen and, 59–60 Rosengren, Eric, 179–80 Rosner, Josh, 222 Roubini, Nouriel, 114 Rubin, Robert, 15–17, 53 Russo, Tom, 146 Ryan, Paul, 199 Sack, Brian, 181 Sanders, Bernie, 9, 168 San Francisco Fed, 44, 47, 63, 88 Santelli, Rick, 233 Sarao, Navinder Singh, 190 savers, 5 Scholes, Myron, 14 Schumpeter, Joseph, 63 Schwartz, Alan, 107–8, 114, 136 Schwarzman, Steve, 166 screwflation, 215–16 seasonal adjustments, in data, 39–40 Segarra, Carmen, 257–58 “Shadow Banking” (Poszar/Market Desk), 191 shadow banking system, 121–29, 167–69, 191–93 shadow unemployment rate, 7–8 Sheets, D.


System Error by Rob Reich

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 2021 United States Capitol attack, A Declaration of the Independence of Cyberspace, Aaron Swartz, AI winter, Airbnb, airport security, Alan Greenspan, Albert Einstein, algorithmic bias, AlphaGo, AltaVista, artificial general intelligence, Automated Insights, autonomous vehicles, basic income, Ben Horowitz, Berlin Wall, Bernie Madoff, Big Tech, bitcoin, Blitzscaling, Cambridge Analytica, Cass Sunstein, clean water, cloud computing, computer vision, contact tracing, contact tracing app, coronavirus, corporate governance, COVID-19, creative destruction, CRISPR, crowdsourcing, data is the new oil, data science, decentralized internet, deep learning, deepfake, DeepMind, deplatforming, digital rights, disinformation, disruptive innovation, Donald Knuth, Donald Trump, driverless car, dual-use technology, Edward Snowden, Elon Musk, en.wikipedia.org, end-to-end encryption, Fairchild Semiconductor, fake news, Fall of the Berlin Wall, Filter Bubble, financial engineering, financial innovation, fulfillment center, future of work, gentrification, Geoffrey Hinton, George Floyd, gig economy, Goodhart's law, GPT-3, Hacker News, hockey-stick growth, income inequality, independent contractor, informal economy, information security, Jaron Lanier, Jeff Bezos, Jim Simons, jimmy wales, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John Perry Barlow, Lean Startup, linear programming, Lyft, Marc Andreessen, Mark Zuckerberg, meta-analysis, minimum wage unemployment, Monkeys Reject Unequal Pay, move fast and break things, Myron Scholes, Network effects, Nick Bostrom, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, NP-complete, Oculus Rift, OpenAI, Panopticon Jeremy Bentham, Parler "social media", pattern recognition, personalized medicine, Peter Thiel, Philippa Foot, premature optimization, profit motive, quantitative hedge fund, race to the bottom, randomized controlled trial, recommendation engine, Renaissance Technologies, Richard Thaler, ride hailing / ride sharing, Ronald Reagan, Sam Altman, Sand Hill Road, scientific management, self-driving car, shareholder value, Sheryl Sandberg, Shoshana Zuboff, side project, Silicon Valley, Snapchat, social distancing, Social Responsibility of Business Is to Increase Its Profits, software is eating the world, spectrum auction, speech recognition, stem cell, Steve Jobs, Steven Levy, strong AI, superintelligent machines, surveillance capitalism, Susan Wojcicki, tech billionaire, tech worker, techlash, technoutopianism, Telecommunications Act of 1996, telemarketer, The Future of Employment, TikTok, Tim Cook: Apple, traveling salesman, Triangle Shirtwaist Factory, trolley problem, Turing test, two-sided market, Uber and Lyft, uber lyft, ultimatum game, union organizing, universal basic income, washing machines reduced drudgery, Watson beat the top human players on Jeopardy!, When a measure becomes a target, winner-take-all economy, Y Combinator, you are the product

Our rules need to evolve quickly as new technologies arrive. They need to be responsive to increases in scale. And they need to be robust to the opportunistic actions of individuals and companies who will try to undermine them. Romer called this Myron’s Law after another Nobel Prize–winning economist, Myron Scholes, who once commented in a seminar, “Asymptotically, any finite tax code collects zero revenue.” By that he meant that clever people will find ways to work around anything that is fixed. The bottom line is that our rules need to be as dynamic as the technologies they are designed to regulate. Government Is Complicit in the Absence of Regulation The outcome we have today in the United States—a largely unregulated technology sector with growing market power that is harmful to individuals and society in ways that are impossible to ignore—isn’t just a function of the ways in which innovation tends to outrun effective regulation; it also reflects the deliberate choices of democratically elected politicians in the 1990s.

., 71, 166 Stanford panel discussion on, 119–20 technology and biomedical research, 129–33 See also facial recognition technology private right of action in California, 147 procedural fairness, 92–93 professional ethics, xxx–xxxi, 244 ProPublica investigation of racism in Florida’s criminal court, 97 Public Access to Court Electronic Records (PACER), xxiii public health vs. factory farms, 20–21 Putin, Vladimir, 84 quantitative hedge funds using AI, 163–64 Rabois, Keith, 191–92 racial discrimination in machine-based recruiting system, 80–81 Rahwan, Iyad, 179 random “noise” in data, 131–32 randomized response survey design, 131–32 Rawls, John, 93–94 Reagan, Ronald, 258–59 Really Simple Syndication (RSS) specification, xxii recruiting system with gender bias, 81–82, 83 Reddit, xxii, 44 regret minimization framework, 30 regulations overview, 53 antitrust-based, 55–59, 227–28 based on OTA nonpartisan information, 258 constrain market dominance of big tech companies, 256–57 for creating healthy market competition, 229–30 government’s complicity in absence of, 59–63 matching tech sector innovation with appropriate regulatory structures, 261 medical research and education regulations, 244–51 policy-makers’ dilemma, 56–57 and politicians’ limited tech knowledge, 52–53 on tech start-ups, 45 technical ignorance of lawmakers, 71–72 technology companies lobby for autonomy, 46 when social consequences become intolerable, 55 Reich, Rob, xvi, 22–23 Renaissance Technologies, 163–64 representational adequacy, 13 Republic, The (Plato), 65–66 résumés and algorithmic decision-making, 82–87, 109 revenue optimization process, 43–45 Rhinehart, Rob, 7–9, 20 road safety, 154–55, 239 role of citizens in a democracy, xiv Romer, Paul M., 58–59, 176 Rush, Benjamin, 3 safety, 53–54, 55, 133–34, 154–55, 239 Sahami, Mehran, xv, 27, 38 Samuel, Arthur, 84, 156 San Bernardino, California, terrorist attack, 72, 134–35 Sanger, Larry, 195 Schatz, Brian, 240 Scholes, Myron, 59 search engine optimization (SEO), 196 Section 230, Communications Decency Act (CDA 230), 62, 221–23, 225 security, 20, 56, 71–72, 111–14, 116–17, 121–25, 128–29, 134–35, 141, 156, 166, 258 self-driving vehicles DARPA Grand Challenge, 153–54 effect on truck drivers and trucking industry, 175 human nature vs., 155–56 human pleasure from driving, 172 safety of, 154–55 in Silicon Valley, 186 society’s response to, 175 Sen, Amartya, 74, 172–73 separations regime, 229 September 11, 2001, terrorist attacks, 116 Sherman, John, 228 Sherman, Rob, 119–20 Shklar, Judith, 76 Siebel, Michael, 40 Sifton, Sam, 9 Silicon Valley, xiv, xxv–xxvi, 28, 40–41, 73 Silverberg, Nicole, 188 Simplex algorithm, 12 smart machines and humans, 153–86 overview, 160–65 autonomous weapons, 177–78 benefits for people whose jobs are changed or lost, 182–86 choice of human flourishing or greater productivity, 169 deep learning concept, 161–62 ethics and AI, 165–66 jobs lost and other costs of adjustment, 174–76 keeping humans in the loop, 178–82 livelihood destroying potential, 170–71 overcoming poverty to promote human flourishing, 170–71 value of freedom, 172–73 virtual reality, the experience machine, 167–69 Snowden, Edward, 116, 126, 139, 143–45 social and political ethics, xxxi–xxxiii Social Dilemma, The (documentary), 238–39 “Social Responsibility of Business Is to Increase Its Profits, The” (Friedman), 37–38 social safety nets, Europe and US compared, 185–86 social science, xv–xvii, xxvi, 137–40 Software Engineering Code of Ethics, 248 Solove, Daniel, 140 Soylent, 6–9, 20 Soylent Green (film), 7–8 Spliddit’s “provably fair solutions,” 88–89 Stanford University, Stanford, California overview, xiv, xv, xvi hate speech or hateful protected speech, 191–92 panel discussion on privacy concerns, 119–20 study of libertarian attitudes of tech leaders, 52 teaching computer science with social science and ethics, 251 VCs showcasing their new companies, 42–45 start-up accelerators, 44.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, Cass Sunstein, classic study, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, Cornelius Vanderbilt, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, equity risk premium, financial engineering, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, land bank, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, public intellectual, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, tontine, too big to fail, trade liberalization, trade route, transatlantic slave trade, tulip mania, wage slave

In particular, they led to the development of financial derivatives—financial tools referred to by investor Warren Buffett as “weapons of mass destruction,”1 but which are also are widely recognized as the fundamental tools of insurance and risk mitigation. We shall see that the work of three of the giants of modern finance, Robert Merton, Fischer Black, and Myron Scholes, built directly on the insights and techniques of the French mathematical tradition—both in terms of its strength and also its weakness. This last point is reserved for a discussion about a modern French mathematician, and my former Yale colleague, Benoit Mandelbrot. RANDOM WALKS Almost nothing is known about the nineteenth-century French stockbroker Jules Regnault (1834–1894).

It nearly, but not exactly, solved the problem of how to value an option—and thanks to Lefèvre, that means he came close to being able to value a complex portfolio of options, hedges, and speculations. The option pricing problem would not be solved precisely until much later in the twentieth century. The scholars who did so, Myron Scholes, Fischer Black, and Robert Merton, recognized Bachelier’s contribution. Scholes and Merton accepted the Nobel Prize in Economic Sciences in 1997 for their work on this important financial problem. Fischer Black had passed away before he could share in the award. MODELS AND MODERN MARKETS Scholes and Merton were professors of financial economics at the Massachusetts Institute of Technology in 1970, where they met the economist Fischer Black.

., 478, 480–81 Saint Petersburg Stock Exchange, 443–45 Salamis tablet, 83 salt mining, Chinese market for shares in, 197 salt monopoly of Chinese state, 174, 186, 190, 302, 431 salt taxes: of Genoese government, 291; of Venetian government, 228 salt vouchers, Chinese, secondary market in, 186 saving: by investment, 6; Keynes on, 456, 461; role of bonds in, 141. See also retirement Schaps, David, 99, 100 Scheiber, Sylvester, 497 Schmandt-Besserat, Denise, 23–24, 25–26 Scholastic philosophers, 233–34, 235–36, 246, 247, 248 Scholes, Myron, 276, 283–84 Science and Civilization in China (Needham), 194, 196, 270 scientific method in the West, 196–97 Scott, William Robinson, 328, 330, 341–42, 343 Seaford, Richard, 95 Second Punic War, 122, 128–29, 132 Securities and Exchange Commission (SEC): established during Depression, 490; fixing investment trusts of 1920s, 500–501, 503; rationale for, 8; skyscraper bonds and, 480–81 securitization: basic concept of, 382, 386; of land, 386–88, 393; of mortgages (see mortgage-backed securities) Security Analysis (Graham and Dodd), 489–90, 507 Sejanus, 107, 108 Seleucid empire, 70 Self-Strengthening Movement, Chinese, 430, 440 Seneca, 114–16, 120 serfdom, finance freeing Europeans from, 234 Sert, Josep Maria, 491–92 Shang dynasty (1766–1045 BCE), 143, 145–49, 151, 152, 158, 161, 271 Shanghai: as banking center, 141, 159; British trading rights in, 425; China Merchants Steamship Navigation Company in, 424, 430–32; Chinese investors in companies launched in, 429, 430–31; HSBC and, 427–28, 429, 431, 438, 440; as major financial center, 423, 424, 442; stock market of, 141, 438–42 shareholder democracy, 358, 469–70, 514 shareholders: in America of 1920s, 469–70; of ancient Rome, 17, 104, 122–25, 126–27, 135, 289; benefited by stock options for CEO, 171; in early twentieth-century China, 433–34, 435, 437; of European corporation, 289; of Honor del Bazacle, 297–301; of Muscovy Company, 309–10.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

Abraham Maslow, accounting loophole / creative accounting, Alan Greenspan, AOL-Time Warner, Asian financial crisis, bank run, Bear Stearns, book value, Bretton Woods, business cycle, capital controls, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Bogle, John Meriwether, junk bonds, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, low interest rates, market bubble, Mary Meeker, Michael Milken, minimum wage unemployment, MITM: man-in-the-middle, Money creation, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, scientific management, shareholder value, short selling, Silicon Valley, Simon Kuznets, tail risk, Tax Reform Act of 1986, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

He hired mathematically oriented experts with Ph.D.’s in economics, finance, and physics who were more skilled than he. These men built computer models and teased out relationships within complex securities that others had not found. The computations were often based on an estimate of the value of a stock option first published by economist Myron Scholes of the University of Chicago and mathematician Fischer Black of MIT. The Black-Scholes model, based on estimated fluctuations (volatility) of securities prices, became the basis of derivatives trading and the measurement of portfolio risk. Mispricing in the markets was, with refinements, basically a deviation from the Black-Scholes price.

By contrast, high inflation made bonds more volatile, which, coupled with new derivatives products, created a new and rising tide of profitable opportunities. In the 1980s, Meriwether hired several leading academic economists as consultants. They included Robert Merton, of MIT and then Harvard Business School, who had been a professor to several of Meriwether’s traders, and also Myron Scholes, who was at the University of Chicago. Fischer Black took a full-time job with Goldman Sachs. Scholes and Merton won the 1997 Nobel Prize in economics for their statistical theories (Black, who died in 1995, would have been named as well had he lived). After the stock market crash of 1987, most traditional hedge fund managers, including Soros, lost heavily (as noted, Paul Tudor Jones and Julian Robertson were conspicuous exceptions).

Germain, Fernand sales volume, 1.1, 12.1, 12.2, 16.1, 16.2, 16.3 Salomon, William Salomon Brothers, 1.1, 1.2, 3.1, 5.1, 6.1, 15.1, 15.2, 15.3, 16.1, 16.2, 17.1, 17.2, 17.3, 18.1, 18.2, 18.3, 18.4, 18.5, 18.6, 19.1, 19.2, 19.3 Salomon Smith Barney, 16.1, 17.1, 17.2, 17.3, 17.4, 17.5, 17.6, 17.7, 17.8 Sambol, David, 18.1, 18.2, 18.3 Samuelson, Paul, 2.1, 2.2, 19.1 Samuelson, Robert Sanford, Charles Sarbanes, Paul Sarbanes-Oxley bill, 17.1, 17.2 Saunders, Walter savings and loans (S&Ls), 6.1, 6.2, 11.1, 11.2, 12.1, 13.1, 13.2, 13.3, 14.1, 14.2, 17.1 18.1, 18.2, 18.3, 18.4, 19.1, 19.2, 19.3, 19.4, 19.5 Schlesinger, Arthur, Jr. Schlesinger, James Schmidt, Helmut Scholes, Myron, 15.1, 15.2, 15.3 Schonfeld, Reese Schultze, Charles, 9.1, 9.2, 9.3, 9.4, 11.1 Schwartz, Alan Schwartz, Anna, 2.1, 2.2, 2.3, 2.4 Schwartz, Peter Schwarzman, Stephen, 4.1, 18.1 Screen Actors Guild (SAG), 7.1, 7.2 Sears, 5.1, 6.1, 8.1, 14.1 Secondary Mortgage Market Enhancement Act (1984) Securities and Exchange Commission (SEC), 1.1, 4.1, 5.1, 6.1, 8.1, 12.1, 13.1, 13.2, 13.3, 14.1, 15.1, 15.2, 15.3, 15.4, 15.5, 15.6, 16.1, 16.2, 17.1, 17.2, 17.3, 17.4, 17.5, 17.6, 17.7, 17.8, 17.9, 17.10, 18.1, 18.2, 18.3, 19.1, 19.2, 19.3 Securities Investor Protection Corp.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

3Com Palm IPO, Alan Greenspan, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, behavioural economics, Berlin Wall, Bernie Madoff, Black-Scholes formula, book value, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, low interest rates, market clearing, Mason jar, mental accounting, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, PalmPilot, Paul Samuelson, payday loans, Ponzi scheme, Post-Keynesian economics, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, risk free rate, Robert Shiller, Robert Solow, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

CRSP released its first database in 1964, and research in the field immediately took off, with University of Chicago locals leading the way. Chief among these were Miller, Fama, and a group of exceptional graduate students including Michael Jensen, Richard Roll (a distinguished scholar and longtime professor at UCLA), and Myron Scholes, the co-inventor of the Black–Scholes option-pricing model. Research proceeded quickly. By 1970 the theory and evidence supporting the EMH was sufficiently well-established that Fama was able to publish a comprehensive review of the literature that stood for many years as the efficient market bible.

Petersburg paradox, 27 sales, 61–62 Samuelson, Paul, 159 economics formalized by, 44, 94 financial economics work of, 208 “public goods” formalized by, 144–46 on rationality of repeat betting, 192–95, 197 time inconsistency and, 92 utility measured by, 89–90, 92, 99 Save More Tomorrow, 314–22, 318, 341 lack of randomized control trial test of, 338n savings, 54 after-tax financial return on, 309–13 standard theories of, 309 savings, for retirement, 7, 9, 50, 52, 80, 345, 370 automatic enrollment, 313–22, 318 inertia in, 313 loss aversion in, 313–14 and marginal propensity to consume, 98 narrow framing of, 195–98, 196 nest egg amount and, 309–10 and present bias, 314 self-control and, 314 Scarcity (Mullainathan and Shafir), 58n, 366 Schachter, Stanley, 180 Schelling, Thomas, 12–13, 14, 37n, 100, 104n, 178 in Behavioral Economics Roundtable, 181 Schiphol International Airport, 326 Scholes, Myron, 208 Schwartz, Alan, 197 Science, 22, 319 scientific revolutions, 167–68, 169–70 secret sales, 119–20 Security Analysis (Graham and Dodd), 219–20 Seeger, Pete, 65 self-control, 54, 85–86, 99–111, 115 as about conflict, 103 retirement savings and, 314 and savings for retirement, 309 two selves in, 103–5 willpower and, 87–99, 363 self-interest, bounded, 258 selfishness, 145–46 Sen, Amartya, 145 sense of humor, 218, 219, 223 Shafir, Eldar, 58n, 67–68, 69, 71, 179, 257, 366 Shankar, Maya, 344 Shapiro, Jesse, 75–76, 357 Sharpe, William, 208, 226, 229 Shaton, Maya, 198 Shea, Dennis, 315–17 Shefrin, Hersh, 98, 104, 164–66, 167, 223–24 Shiller, Robert, 5n, 176, 242 in behavioral economics debate, 159, 167–68 in Behavioral Economics Roundtable, 181 behavioral finance workshop organized by, 236 and behavioral macroeconomics, 349 housing prices studied by, 235, 252 as president of AEA, 347 on variability of stock prices, 230–33, 231 Shleifer, Andrei, 175, 178 closed-end fund paper of, 240–43, 244 on limits of arbitrage, 249 Signal and the Noise, The (Silver), 292 Silva, Rohan, 330–33, 334 Silver, Nate, 47, 292 Simon, Herbert, 23, 29 in behavioral economics debate, 159, 162 Sinden, John, 148–49 skiing, 115–20, 138 Slovic, Paul, 21, 36, 48 slow hunch, 39–40 Small Business Administration, 351, 352n Smith, Adam, 7, 51–52, 58, 87–88, 89, 103 Smith, Cliff, 206 Smith, Roger, 123 Smith, Vernon, 40, 41, 148, 149 “learning” critique of experimental economics, 153 snow shovels, 20, 64–65, 127–29, 133, 136, 137 Snyder, Daniel, 288–89, 290n Social Security, 322 Society for Judgment and Decision Making, 180n Society of Actuaries, 14 Soll, Jack, 75 Solow, Robert, 259 Soman, Dilip, 66–67 Sony, 135–36 sophisticated agents, 110–11 sporting events, tickets for, 18–19, 57–58 spreadsheets, 214n Stanford Law Review, 258–59 Stanford University, 35–41, 125, 126, 185 statistical lives, 13 Statman, Meir, 104, 164–66, 167 status quo, 131 bias, 154 and Weber-Fechner law, 32 Staw, Barry, 65 Steinberg, Saul, 91 Stewart, Jon, 352 sticky wages, 131–32 Stigler, George, 37n, 87, 162–63 Stigler, Stephen, 296n Stigler’s Law, 296n Stiglitz, Joseph, 170 stock market, stocks, 7 beating, 206, 207 bonds vs., 191–92, 195–98, 196 calendar effects in, 174 cheap, 219–21 growth, 28, 214–15, 222, 227 October 1987 crash of, 7, 232 regression toward the mean, 222–23 value, 214–15, 220–21, 222, 227–28 variability of prices of, 230–33, 231, 367 “Stock Prices and Social Dynamics” (Shiller), 233 strikes, 372 Strotz, Robert, 99–100, 102, 108 Structure of Scientific Revolutions, The (Kuhn), 169 Stubhub.com, 18–19 stub value, 246, 246 Stulz, René, 243 Sufi, Amir, 78 suggested retail price, 61–63 Summers, Larry, 178, 239–40, 247 sunk costs, 21, 52, 64–73, 118, 180, 261 and revised Ultimatum Game, 266–67 Sunstein, Cass, 258, 260, 269, 322, 323–25, 330, 333, 343, 345 on ethics of nudging, 337n Super Bowl, 139n, 359 supermarkets, 62n supposedly irrelevant factors (SIFs), 9, 24, 315 budgets and, 74 luck on Deal or No Deal, 298 noise traders’ use of, 240 purchase location as, 61 in retirement savings, 310–11, 312, 315 and returns on investments, 196 sunk costs as, 267 tax cuts as, 350 surcharge, discount vs., 18 surge pricing, 136–38, 200n surplus value, 285–86, 285, 286, 288 Susanne (game show contestant), 299–300 Sydney, Australia, 138n Tarbox, Brian, 317–19, 321 tax cuts, 350–51 taxes, 165 compliance with, 334–36 and savings, 309–13 taxi drivers, hours worked by, 11, 199–201, 295 Taylor, Tim, 173n technology bubble, 7, 78, 220, 234, 250, 252 teenage pregnancy, 342 Teichman, Doron, 269 10% club, 277–78, 293–94 test periods, 227 texting, 190n, 342 Thaler, Alan, 14 Thaler, Jessie, 129 Thaler, Maggie, 118n theories, normative vs. descriptive, 25 theory-induced blindness, 93–94, 128 Theory of Games and Economic Behavior, The (von Neumann and Morgenstern), 29 Theory of Interest, The (Fisher), 88–89 Theory of Moral Sentiments, The (Smith), 87–88 “THERE ARE IDIOTS” paper (Summers), 240–41 Thinking, Fast and Slow (Kahneman), 38, 103n, 109, 186 Thompson, Rex, 242 Tierney, John, 327 time, value of, 21 time-inconsistency, 92–93, 99 time-shares, 71 Tirole, Jean, 307 Tobin, James, financial economics work of, 208 tokens, 149–53, 151, 263, 264–65 Tories, see Conservative Party, U.K.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

LSV Asset Management, which manages about $8 billion, is owned by Josef Lakonishok of the University of Illinois, Andrei Shleifer of Harvard, and Robert Vishny of the University of Chicago. Long Term Capital Management, whose failure shook world financial markets in 1998 and which had to be rescued by a group of large banks prodded on by the Federal Reserve, was advised by Nobel laureates Robert Merton and Myron Scholes. 2 The January Effect and the New December Effect Small loser stocks are known to appreciate considerably in January, giving rise to the so-called January effect. The primary explanation for the January effect is tax-loss selling by investors in December to realize capital losses that are used to offset capital gains.

See also Nasdaq 100 Index; Standard and Poor’s (S&P) indexes; Wilshire index Rydex Funds Dynamic funds, 317n6 industry momentum and, 85, 86, 93–98, 96, 100 Mekros Fund, 51 Sector Rotation Fund, 99 Standard and Poor’s 500 index compared to, 97 transactions costs, 95 Ursa, 129 Sabre Holdings, 201–2, 204 sampling bias, 11, 12 SAS software, 133n6 Saturday trading, 46 Sauter, Gus, ix Scholes, Myron, 22n3 Scottrade, 115 Scudder Investments, 252 SDC Mergers and Acquisitions database, 219 seasoned issues, 305, 312, 317n1 sector funds, 85, 86, 89, 98–99, 100 Securities and Exchange Act (1924), 46 Securities and Exchange Commission (SEC) American depository receipts (ADRs) and, 250– 51 insider trades and, 135, 142, 149 Internet resources, 160 merger arbitrage and, 197 Ownership Reporting System, 138 reporting requirements, 134, 136, 146–47, 149 345 346 Index selection bias, 12 self-attribution, 286 Seyhun, Nejat, 147 share repurchases, 136, 309–10, 317n4 Sharpe, William, 8 Sharpe ratios forward rate bias strategies, 276, 279 in forward rate bias strategies, 265 industry momentum and, 81–82, 92, 100, 103n2 Shleifer, Andrei, 22n3 short selling described, xi, xiv, 323–27 difficulties, 5 exchange-traded funds, 322 futures, 110 hedged short sales, 326 hedging, 49, 185 history, 46 industry momentum and, 79, 80 insider trading, 136, 157 merger arbitrage, 199, 202, 217–18, 225–26, 231n3 mutual fund mispricings, 127, 131 price drift, 65, 69, 71–73 process described, 323–26 restrictions on, 16, 317n7, 326 returns and, 302 risks, 5–6, 200 short interest of companies, 45, 48, 49, 52, 54 short squeeze, 325 shorting against the box, 44 speculative short sellers, 327 Standard and Poor’s (S&P) 500 index changes, 163, 180, 182–84, 185–90, 192 stock mergers, 222 unhedged, 44 weekend effect, 40, 43, 44–45 short-term price drift.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

Alan Greenspan, Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, Bletchley Park, business cycle, California gold rush, Charles Babbage, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Dr. Strangelove, Dutch auction, Edward Lloyd's coffeehouse, electricity market, equity premium, equity risk premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, Fairchild Semiconductor, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, George Akerlof, George Gilder, Goodhart's law, Great Leap Forward, greed is good, Gunnar Myrdal, haute couture, Helicobacter pylori, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Kenneth Arrow, Kevin Kelly, knowledge economy, Larry Ellison, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Michael Milken, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, Phillips curve, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, proprietary trading, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, Stuart Kauffman, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, work culture , yield curve, yield management

Hudson's boss, Jack Lavin, was cruder still: "I think my dick just fell of(" Transactions at Long-Term Capital Management were much more Culture and Prosperity { 237} sophisticated. Most investment funds simply buy portfolios of stocks and bonds. A hedge fund such as LTCM trades derivatives and arbitrages between similar securities in different markets. LTCM's partners included Robert Mertonn and Myron Scholes,n who won the Nobel Prize in 1997 for their contributions to financial economics. Merton and Scholes operated with experienced Wall Street traders. Sophisticated investors can use derivative markets to insure their portfolios. By buying a put option at 10% below the current market price, you limit your maximum loss to 10%-the cost of the option is your insurance premium.

., 116 Rousseau, Jean-Jacques, 242,247,253,290 Roux,Paul,85-86,89,90, 137,180,293 rule oflaw, 13, 75, 254, 352 rules, 73-82 Russia debt default (1998), 237 privatization in, 11, 13, 128, 288, 295, 306-7,319,344,355 See also Soviet Union Sachs, Jeffrey, 335 Samuelson, Paul, 179,210,324,330,335,359 San Remo flower market, 14, 146-48, 149, 151-52 Say,Jean-Baptiste, 174, 175, 179 Scherer, Mike, 334 Scholes, Myron, 159, 160-61, 237, 359 Scottish Enlightenment, 83, 126 "second-price auction," 102, 103 securities markets, 91, 92, 148 bonds, 50, 167-69 derivatives, 160-61, 237 and efficient market hypothesis, 236 "equity premium," 235 inception of, 55 investment strategy, 300 knowledge transmission, 270-71 speculation, 150, 151,341 traders' compensation, 321 valuation, 170-71 See also risk; stock markets self-interest, 11, 12-13, 16, 17, 20, 78, 127, 314,327,340 adaptive, 217, 252, 256, 343 American business model, 21, 62,313, 314-18,343-44 and cooperation, 247-48,250,253, 255-56,320 in politics, 12, 250-51 and redistributive market liberalism, 314-15 and Smith (Adam), 197-98 values of, 315-18,342,347 self-regarding materialism, 198,207,217, 315-18 expectation/achievement gap, 286,287 nonmaterialist motives vs., 320, 340 public goods vs., 248 rationality as, 210, 212, 219, 347 self-perpetuating, 216 social norms vs., 255 self-regulation, 349 Sen, Amartya, 327, 359 settlements.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, commodity super cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

How would you go about maximizing the strengths, such as the strong balance sheet and credit worthiness that you mentioned? The most obvious way is to get paid for pockets of illiquidity in the market, and the easiest way of doing that is by investing in safe but less liquid securities. This is one way of being what Myron Scholes calls a liquidity provider to the market, something difficult to be if you are a leveraged player with redemptions, like a hedge fund. A liquidity provider should ideally have long-term money, say for the next 20 or 30 years, maybe forever. This is an underutilized resource among most pension funds, who often think that being fully invested means they have 100 percent of their assets allocated and thus no more liquidity.

See Risk premia payment Price/earnings (P/E) multiples, exchange rate valuation (relationship) Primary Dealer Credit Facility, placement Prime broker risk Princeton University (endowment) Private equity cash flow production tax shield/operational efficiency arguments Private sector debt, presence Private-to-public sector risk Probability, Bayesian interpretation Professor, The bubble predication capital loss, avoidance capital management cataclysms, analysis crowding factor process diversification efficient markets, disbelief fiat money, cessation global macro fund manager hedge fund space historical events, examination idea generation inflation/deflation debate interview investment process lessons LIBOR futures ownership liquidity conditions, change importance market entry money management, quality opportunities personal background, importance portfolio construction management positioning process real macro success, personality traits/characteristics (usage) returns, generation risk aversion rules risk management process setback stocks, purchase stop losses time horizon Titanic scenario threshold trades attractiveness, measurement process expression, options (usage) personal capital, usage quality unlevered portfolio Property/asset boom Prop shop trading, preference Prop trader, hedge fund manager (contrast) Protectionism danger hedge process Public college football coach salary, public pension manager salary (contrast) Public debt, problems Public pensions average wages to returns endowments impact Q ratio (Tobin) Qualitative screening, importance Quantitative easing (QE) impact usage Quantitative filtering Random walk, investment Real annual return Real assets Commodity Hedger perspective equity-like exposure Real estate, spread trade Real interest rates, increase (1931) Real macro involvement success, personality traits/characteristics (usage) Real money beta-plus domination denotation evolution flaws hedge funds, differentiation impacts, protection importance investors commodity exposure diversification, impact macro principles management, change weaknesses Real money accounts importance long-only investment focus losses (2008) Real money funds Commodity Hedger operation Equity Trader management flexibility frontier, efficiency illiquid asset avoidance importance leverage example usage management managerial reserve optimal portfolio construction failure portfolio management problems size Real money managers Commodity Investor scenario liquidity, importance long-term investor misguidance poor performance, usage (excuse) portfolio construction valuation approach, usage Real money portfolios downside volatility, mitigation leverage, amount management flaws Rear view mirror investment process Redemptions absence problems Reflexivity Rehypothecation Reichsmarks, foreign holders (1922-1923) Relative performance, inadequacy Reminiscences of a Stock Operator (Lefèvre) Renminbi (2005-2009) Repossession property levels Republic of Turkey examination investment rates+equities (1999-2000) Reserve currency, question Resource nationalism Returns forecast generation maximization momentum models targets, replacement Return-to-worst-drawdown, ratios (improvement) Reward-to-variability ratio Riksbank (Sweden) Risk amount, decision aversion rules capital, reduction collars function positive convexity framework, transition function global macro manager approach increase, leverage (usage) measurement techniques, importance parameters Pensioner management pricing reduction system, necessity Risk-adjusted return targets, usage Risk assets, decrease Risk-free arbitrage opportunities Risk management Commodity Hedger process example game importance learning lessons portfolio level process P&L, impact tactic techniques, importance Risk premia annualization earning level, decrease specification Risk/reward trades Risk-versus-return, Pensioner approach Risk-versus-reward characteristics opportunities Roll yield R-squared (correlation) Russia crisis Russia Index (RTSI$) (1995-2002) Russia problems Savings ratio, increase Scholes, Myron Sector risk, limits Securities, legal lists Self-reinforcing cycles (Soros) Sentiment prediction swings Seven Sisters Sharpe ratio increase return/risk Short-dated assets Short selling, ban Siegel’s Paradox example Single point volatility 60-40 equity-bond policy portfolio 60-40 model 60-40 portfolio standardization Smither, Andrew Socialism, Equity Trader concern Society, functioning public funds, impact real money funds, impact Softbank (2006) Soros, George self-reinforcing cycles success Sovereign wealth fund Equity Trader operation operation Soybeans (1970-2009) Special drawing rights (SDR) Spot price, forward price (contrast) Spot shortages/outages, impact Standard deviation (volatility) Standard & Poor’s 500 (S&P500) (2009) decrease Index (1986-1995) Index (2000-2009) Index (2008) shorting U.S. government bonds, performance (contrast) Standard & Poor’s (S&P) shorts, coverage Stanford University (endowment) State pension fund Equity Trader operation operation Stochastic volatility Stock index total returns (1974-2009) Stock market increase, Predator nervousness Stocks hedge funds, contrast holders, understanding pickers, equity index futures usage shorting/ownership, contrast Stops, setting Stress tests, conducting Subprime Index (2007-2009) Sunnies, bidding Super Major Survivorship bias Sweden AP pension funds government bond market Swensen, David equity-centric portfolio Swiss National Bank (SNB) independence Systemic banking crisis Tactical asset allocation function models, usage Tactical expertise Tail hedging, impact Tail risk Take-private LBO Taleb, Nassim Tax cut sunset provisions Taxes, hedge Ten-year U.S. government bonds (2008-2009) Theta, limits Thundering Herd (Merrill Lynch) Time horizons decrease defining determination shortening Titanic funnel, usage Titanic loss number Titanic scenario threshold Topix Index (1969-2000) Top-line inflation Total credit market, GDP percentage Total dependency ratio Trade ideas experience/awareness, impact generation process importance origination Traders ability Bond Trader hiring characteristics success, personality characteristics Trades attractiveness, measurement process hurdle money makers, percentage one-year time horizon selection, Commodity Super Cycle (impact) time horizon, defining Trading decisions, policy makers (impact) floor knowledge noise level ideas, origination Tragedy of the commons Transparency International, Corruption Perceptions Index Treasury Inflation-Protected Securities (TIPS) trade Triangulated conviction Troubled Asset Relief Program (TARP) Turkey economy inflation/equities (1990-2009) investment rates+equities (1999-2000) stock market index (ISE 100) Unconventional Success (Swensen) Underperformance, impact Undervaluation zones, examination United Kingdom (UK), two-year UK swap rates (2008) United States bonds pricing debt (1991-2008) debt (2000-2008) home prices (2000-2009) hyperinflation listed equities, asset investment long bonds, market pricing savings, increase stocks tax policy (1922-1936) trade deficit, narrowing yield curves (2004-2006) University endowments losses impact unlevered portfolio U.S.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Eliot, ‘East Coker’, The Four Quartets ‘You’ve got to expect the unexpected.’ Paul Lambert, Aston Villa manager, press conference, 22 November 2013 Are we really capable of expecting the unexpected?1 In 1998, the hedge fund Long-Term Capital Management (LTCM) failed, although its senior management team comprised two Nobel Laureates in Economic Science, Myron Scholes and Robert Merton, and an experienced practitioner in financial markets, John Meriwether. Their strategy, successful at first, was to create a highly leveraged fund that bought large amounts of one asset and sold equally large amounts of a slightly different asset (for example, government bonds of slightly different maturities), so as to exploit anomalies in the pricing of those assets.

., 308 resolution mechanisms, 256, 279 Richardson, Gordon, 176 risk, 84, 121–2, 123, 124, 126–9, 143, 254; implicit taxpayer subsidy for, 191–2, 207, 254–5; maturity and risk transformation, 104–15, 117–19, 250–1, 254–5; ‘optimising’ model, 129–31, 132, 134, 138, 309, 311; risk premium, 32–3, 115, 183; risk weights, 138–9, 258–9, 277 Robinson, Joan, 12, 292–3 Rodrik, Dani, 348 Rogoff, Kenneth, 44, 308 Rome, ancient, 59, 164, 216 Roosevelt, President Franklin, 91, 316 Royal Bank of Scotland (RBS), 37, 89, 118, 206, 243 Russia, 121, 159 saving, 101–2, 155, 308–17, 362–3; in emerging economies, 22–3, 27–8, 29, 30; ‘paradox of thrift’, 297, 326; ‘savings glut’, 28, 29, 30, 46, 319, 325; as source of future demand, 11, 46, 84–5, 185, 325–6, 356 Schacht, Hjalmar, 341–2, 343 Schäuble, Wolfgang, 211 Scholes, Myron, 120–1 Schumpeter, Joseph, 152 Schwartz, Anna, 192, 328 Scotland, 218, 243–7, 248 Second World War, 20, 21, 219, 242, 317, 342 secular stagnation theory, 44, 291–2, 355 Seneca, 123–4 11 September 2001 terrorist attacks, 124 ‘shadow’ banking system, 107, 112–14, 256, 262, 274 Shiller, Robert, 151 Silber, William, 206 Simons, Henry, 262 Sims, Christopher, 79 Slovakia, 216 Smith, Adam, 17–18, 54–5, 79–80, 163 Smith, Ed, 124 sovereign debt (government bonds), 32, 65, 92, 138, 182–4, 196–7, 203, 258, 259, 338–40; bond yields, 29, 183–4, 224, 227, 228, 231, 299, 336; in euro area, 162, 190, 224, 226–31, 258, 338, 339–40, 342–4; framework for restructuring, 346–7; need for export surplus before payment, 339–40, 341–3; WW1 reparations, 340–2, 343, 345–6 Soviet Union, 27, 68, 216 Spain, 47, 93, 159, 216, 221, 222, 227–8, 229, 257–8, 355, 363–4 special purpose vehicles, 113–14 stock markets, 102, 125–6, 133, 151–4, 194, 195, 200, 347 Stresemann, Gustav, 219 Summers, Larry, 44 Sweden, 159, 166, 173, 179, 216–17, 279, 335 Swift, Jonathan, ‘Thoughts on Various Subjects’ (1703), 250, 290 Switzerland, 33, 70, 100, 118, 184, 216, 335 Syed, Matthew, 124 Taylor, John, 168 technological change, 83–4, 127, 129, 153–4, 281, 291, 354, 355, 365 Tequila crisis (1994), 367 Thaler, Richard, 132 Thornton, Henry, 188 Tobin, James, 262 trade surpluses and deficits, 33, 34, 46, 319, 321–2, 329, 352, 356, 364; in emerging economies, 27–8, 30, 329; in EMU, 222, 232–3, 236, 363–4; and exchange rates, 22–3; and interest rates, 23, 30, 46, 319–20; likely re-emergence of, 48–9 trading, financial, 3, 24, 64, 99–100, 257; bonuses, 99, 101, 117, 144, 147; erosion of ethical standards, 100–1, 288; ‘front-running’, 153–4, 284 Transatlantic Trade and Investment Partnership (TTIP), 361 Trans-Pacific Partnership (TPP), 361 Trichet, Jean-Claude, 225 trust, 10, 81–3, 106; and monetary unions, 220, 232, 237; and money, 8, 55, 57, 66–71, 82–3, 155 Tsipras, Alexis, 230, 231 Tuckett, Professor David, 133–4 Turner, Adair, 324 Tversky, Amos, 132 unemployment, 38, 292, 293, 294, 297–9, 302, 326–7, 329, 330; in euro area, 45, 226, 228, 229–30, 232, 234, 345; and inflation targeting, 168, 169; and interest rates, 169, 298–300; ‘stagflation’ (1970s), 5, 302–3, 318 United Kingdom: Acts of Union (1707), 215; alternative strategies for pre-crisis period, 328–32; Banking Act (2009), 40; Banking and Joint Stock Companies Act (1879), 109; Banking Reform Act (2013), 40; ‘Big Bang’ (1986), 23; City of Glasgow Bank failure (1878), 108–9; commercial property market, 47, 118; Currency and Bank Notes Act (1914), 198; Labour government (1964-70), 20; as monetary union, 215; need for export sector support, 357, 364; return to gold standard (1920s), 76; Scottish independence referendum (2014), 218, 243–5, 248; trade deficits, 30, 321, 322, 329, 364; tradition of national branch banking, 116; see also Bank of England United Nations, 214–15 United States: 1914 financial crisis, 192–201, 206; Aldrich-Vreeland Act (1908), 196, 206; Bureau of War Risk Insurance (1914), 200; Constitution, 286; Dodd-Frank Reform (2010), 40, 260; dollar and gold link, 73, 195, 200–1; dollar as world’s reserve currency, 25, 28, 34; ‘double liability’ (1865-1934), 107–8; ‘free banking’ era, 60–2, 77, 161; Glass-Steagall Act (1933), 23, 98, 260; gold reserves, 74, 77; Gramm-Leach-Bliley Act (1999), 23, 98; history of money in, 57–8, 67, 68, 160–1, 187, 188, 212, 215; as monetary union, 212, 215, 234; need for export sector support, 357, 364; New York becomes world money centre, 194–5, 200–1; notes and coins in, 281; Office of the Comptroller of the Currency, 137, 206; trade deficits, 30, 34, 46, 49, 319, 321, 329, 364 Van Court’s Counterfeit Detector and Bank Note List, 61 Vietnam War, 5, 20, 73, 306 Viniar, David, 123 Volcker, Paul, 176, 288 Voltaire, 126 Wall Street Crash (1929), 347 Walpole, Horace, 369 Walras, Léon, 79 Washington, George, 286 Weatherstone, Sir Dennis, 136–7, 278 weights and measures, 212, 286, 287 Wheeler, Judge Thomas C., 162 wholesale funding, 97 Willetts, David, 83 Wilson, Brigadier-General Henry, 89 Wimbledon tennis championships, 142, 187–8 Wolf, Martin, 96, 262 World Bank, 21, 350 World Trade Organisation, 361 Yellen, Janet, 176, 287 Yugoslavia, break-up of, 216 Zimbabwe, 68, 69–70 ABOUT THE AUTHOR Mervyn King was Governor of the Bank of England from 2003 to 2013, and is currently Professor of Economics and Law at New York University and School Professor of Economics at the London School of Economics.


pages: 374 words: 114,600

The Quants by Scott Patterson

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, book value, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Carl Icahn, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Dr. Strangelove, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, Jim Simons, job automation, John Meriwether, John Nash: game theory, junk bonds, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, Mark Spitznagel, merger arbitrage, Michael Milken, military-industrial complex, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, short squeeze, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

Little. In the fall of 1968, he met Myron Scholes, a young MIT economist from Canada. Scholes had recently started thinking about a tough problem: how to price stock warrants. Black had been mulling over the same puzzle. The pair teamed up with Robert Merton and several years later published their groundbreaking research, with a little help from Thorp, on how to price stock options. In the early 1970s, Black took a job teaching finance at the University of Chicago. His third-floor office in Rosenwald Hall was sandwiched between the offices of Myron Scholes and Eugene Fama. He then took a job teaching at MIT for the following nine years.

Thorp programmed formulas for tracking and pricing warrants into a Hewlett-Packard 9830A he’d installed in his office in Newport Beach, Keeping tabs on Wall Street thousands of miles away from the edge of the Pacific Ocean. In 1973, Thorp received a letter from Fischer Black, an eccentric economist then teaching at the University of Chicago. The letter contained a draft of a paper that Black had written with another Chicago economist, Myron Scholes, about a formula for pricing stock options. It would become one of the most famous papers in the history of finance, though few people, including its authors, had any idea how important it would be. Black was aware of Thorp and Kassouf’s delta hedging strategy, which was described in Beat the Market.

LTCM’s trades, based on sophisticated computer models and risk management strategies, employed unfathomable amounts of leverage. When the market behaved in ways those models never could have predicted, the layers of leverage caused the fund’s capital to evaporate. The traders behind LTCM, whose partners included option-formula creators Myron Scholes and Robert Merton, have often said that if they’d been able to hold on to their positions long enough, they’d have made money. It’s a nice theory. The reality is far more simple. LTCM went all in and lost. Black Monday left an indelible stamp on the very fabric of the market’s structure. Soon after the crash, options traders started to notice a strange pattern on charts of stock-option prices.


pages: 585 words: 151,239

Capitalism in America: A History by Adrian Wooldridge, Alan Greenspan

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, agricultural Revolution, air freight, Airbnb, airline deregulation, Alan Greenspan, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, barriers to entry, Bear Stearns, Berlin Wall, Blitzscaling, Bonfire of the Vanities, book value, Bretton Woods, British Empire, business climate, business cycle, business process, California gold rush, Charles Lindbergh, cloud computing, collateralized debt obligation, collective bargaining, Corn Laws, Cornelius Vanderbilt, corporate governance, corporate raider, cotton gin, creative destruction, credit crunch, debt deflation, Deng Xiaoping, disruptive innovation, Donald Trump, driverless car, edge city, Elon Musk, equal pay for equal work, Everybody Ought to Be Rich, Fairchild Semiconductor, Fall of the Berlin Wall, fiat currency, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, full employment, general purpose technology, George Gilder, germ theory of disease, Glass-Steagall Act, global supply chain, Great Leap Forward, guns versus butter model, hiring and firing, Ida Tarbell, income per capita, indoor plumbing, informal economy, interchangeable parts, invention of the telegraph, invention of the telephone, Isaac Newton, Jeff Bezos, jimmy wales, John Maynard Keynes: technological unemployment, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, labor-force participation, land bank, Lewis Mumford, Louis Pasteur, low interest rates, low skilled workers, manufacturing employment, market bubble, Mason jar, mass immigration, McDonald's hot coffee lawsuit, means of production, Menlo Park, Mexican peso crisis / tequila crisis, Michael Milken, military-industrial complex, minimum wage unemployment, mortgage debt, Myron Scholes, Network effects, new economy, New Urbanism, Northern Rock, oil rush, oil shale / tar sands, oil shock, Peter Thiel, Phillips curve, plutocrats, pneumatic tube, popular capitalism, post-industrial society, postindustrial economy, price stability, Productivity paradox, public intellectual, purchasing power parity, Ralph Nader, Ralph Waldo Emerson, RAND corporation, refrigerator car, reserve currency, rising living standards, road to serfdom, Robert Gordon, Robert Solow, Ronald Reagan, Sand Hill Road, savings glut, scientific management, secular stagnation, Silicon Valley, Silicon Valley startup, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, stem cell, Steve Jobs, Steve Wozniak, strikebreaker, supply-chain management, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, total factor productivity, trade route, transcontinental railway, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, Unsafe at Any Speed, Upton Sinclair, urban sprawl, Vannevar Bush, vertical integration, War on Poverty, washing machines reduced drudgery, Washington Consensus, white flight, wikimedia commons, William Shockley: the traitorous eight, women in the workforce, Works Progress Administration, Yom Kippur War, young professional

But the debates in Basel over the pending global capital accord that emerged as Basel II were largely over whether to keep bank capital requirements unchanged or even to reduce them. Leverage accordingly ballooned. Moreover, there was an excess of confidence in mathematical models of risk management. One pricing paradigm, derivatives, was so successful that three of its creators—Harry Markowitz, Robert Merton, and Myron Scholes—won Nobel Prizes (and a fourth, Fischer Black, would have done so had he lived). It was also so thoroughly embraced by academia, central banks, and regulators that by 2006 it had become part of the core of the global regulatory standards embodied in Basel II. Many quantitative investment firms whose number crunching sought to expose profitable market trading principles were successful so long as risk aversion moved incrementally (which it did most of the time).

., 234–35, 237, 239–62 fireside chats, 204, 240, 243, 252 New Deal, 25–26, 225–26, 242–62, 415 wartime renaissance, 266, 268–70 Roosevelt, Theodore, 110, 124, 153, 179, 181–85, 268, 427 “Rosie the Riveter,” 363 rubber, 47, 110, 198–99 Rubin, Robert, 332 Rumsfeld, Donald, 306, 368 russet potato, 118 Rust Belt, 321–23, 366 Sanders, Harland, 197, 443 San Francisco–Oakland Bay Bridge, 90 Santa Clara County v. Southern Pacific Railroad Co., 159 Sarbanes-Oxley Act of 2002, 369, 411 Saunders, Clarence, 215–16 savings rate, 377 Saxenian, AnnaLee, 353 Schlesinger, Arthur, Jr., 325, 423 Schlitz Brewing, 263 Schmidt, Eric, 355 Scholes, Myron, 383 Schultz, Howard, 333 Schumpeter, Joseph, 9, 14, 138–39, 169, 319, 333, 397, 424 Schwartz, Anna, 236 Scientific American, 147 Scopes, John, 153, 195–96 Scotch Irish, 60, 68 SeaLand Service, 292–93 Sears, Richard Warren, 140–42 “secular stagnation,” 4, 273 Securities and Exchange Commission (SEC), 243, 411 securitization, 340–41, 377–78 Sedition Act of 1918, 186 self-interest, 6–7 semiconductor industry, 317 sentencing guidelines, 398–99 September 11 attacks, 368, 369–70, 372 Servan-Schreiber, Jean-Jacques, 294–95 service sector, 195 7-Eleven, 263 Seventeenth Amendment, 179 Seventies, the, 299–325 sexism, 363 Shane (movie), 111 sharecropping, 87 “shareholder activism,” 338 shareholders, 206–9 Shaw, George Bernard, 310 Sherman, John, 84 Sherman, William Tecumseh, 80, 84 Sherman Antitrust Act of 1890, 143, 154, 159–60, 162, 184 Sherman Silver Purchase Act of 1890, 162 Shockley, William, 352 Shultz, George, 329 Silicon Valley, 28, 351–55, 366 Silliman, Benjamin, 101 silver, 152, 161–62 Sinclair, Upton, 177, 245 Singer, Isaac, 47, 48, 422 Sixteenth Amendment, 184, 427 Slater, Samuel, 71 slaughterhouses, 118–19 slavery, 9, 33–34, 43, 60–61, 74–87, 419, 433, 434 average price of prime field hand, 76, 76 Sloan, Alfred, 209–12 Smith, Adam, 6–7, 36, 256 Smith, Fred, 333 Smith, Gerald L.


pages: 204 words: 58,565

Keeping Up With the Quants: Your Guide to Understanding and Using Analytics by Thomas H. Davenport, Jinho Kim

behavioural economics, Black-Scholes formula, business intelligence, business process, call centre, computer age, correlation coefficient, correlation does not imply causation, Credit Default Swap, data science, en.wikipedia.org, feminist movement, Florence Nightingale: pie chart, forensic accounting, global supply chain, Gregor Mendel, Hans Rosling, hypertext link, invention of the telescope, inventory management, Jeff Bezos, Johannes Kepler, longitudinal study, margin call, Moneyball by Michael Lewis explains big data, Myron Scholes, Netflix Prize, p-value, performance metric, publish or perish, quantitative hedge fund, random walk, Renaissance Technologies, Robert Shiller, self-driving car, sentiment analysis, six sigma, Skype, statistical model, supply-chain management, TED Talk, text mining, the scientific method, Thomas Davenport

Peter Passell, “Wine Equation Puts Some Noses Out of Joint,” New York Times, March 4, 1990. 14. “Alternative Rich List,” FT.com, September 22, 2006. 15. Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (1973): 637–654; “Black–Scholes,” Wikipedia, http://en.wikipedia.org/wiki/Black–Scholes; “The Prize in Economics 1997,” press release, Nobelprize.org, http://nobelprize.org/nobel_prizes/economics/ laureates/1997/press.html. 16. Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (May 1973). 17. R. J.

He says: “Statistic predictor signals erode over the next several years; it can be five years or ten years. You have to keep coming up with new things because the market is against us. If you don’t keep getting better, you’re going to do worse.” Analytical Thinking Example: Black-Scholes Option Pricing Model Fischer Black and Myron Scholes solved a problem in stock valuations that had long bedeviled investors.15 Black, a PhD in applied mathematics from Harvard, was then working at the consulting firm of Arthur D. Little, Inc.; Scholes, a freshly minted PhD in economics from Chicago, had just joined the faculty of the MIT Finance Department.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", 3Com Palm IPO, Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, beat the dealer, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, book value, Brownian motion, buy and hold, buy low sell high, caloric restriction, caloric restriction, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, Garrett Hardin, George Santayana, German hyperinflation, Glass-Steagall Act, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Bogle, John Meriwether, John Nash: game theory, junk bonds, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, Mason jar, merger arbitrage, Michael Milken, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, PalmPilot, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, power law, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stock buybacks, stocks for the long run, survivorship bias, tail risk, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Tragedy of the Commons, uptick rule, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

This converted an unusable formula with unknown quantities into a simple practical trading tool. I began using it for my own account and for my investors in 1967. It performed spectacularly. In 1969, unknown to me, Fischer Black and Myron Scholes, motivated in part by Beat the Market, rigorously proved the identical formula, publishing it in 1972 and 1973. This launched the development and widespread use of so-called derivative securities throughout the financial world. For their contributions, Myron Scholes and Robert Merton received the Nobel Prize in Economics in 1997. The Nobel committee acknowledged Fischer Black’s (1938–95) contributions, and it is generally agreed that he would have shared in the prize had he not died earlier from throat cancer.

A couple of months before the CBOE opened, I was ready to trade with the formula for pricing options that I thought no one else knew. Princeton Newport was going to clean up. Then I received a letter and a prepublication copy of an article from someone I hadn’t heard of named Fischer Black. He said he was an admirer of my work and that he and Myron Scholes had taken a key idea from Beat the Market, known as delta hedging, a step further and derived an options formula. I scanned the article and saw it was the same formula I was using. The good news was that their rigorous proof verified that the formula I had discovered intuitively was correct. The bad news was that the formula was now public knowledge.

The list of issues goes on, the point being that hedge fund investors don’t have much protection and that the most important single thing to check before investing is the honesty, ethics, and character of the operators. The hedge fund Long-Term Capital Management was launched in 1994 with a dream team of sixteen general partners, led by the legendary former Salomon Brothers trader John Meriwether and two future (1997) Nobel Prize winners in economics, Robert Merton and Myron Scholes. The group included other former Salomon traders, more distinguished academics, and a former Federal Reserve vice chairman. Investors included the central banks of eight countries, plus major brokerages, banks, and other institutions. The principals of a financial engineering group I knew, who were coincidentally doing work for LTCM at that time, asked if I had an interest in investing in the fund.


pages: 693 words: 169,849

The Aristocracy of Talent: How Meritocracy Made the Modern World by Adrian Wooldridge

"World Economic Forum" Davos, Ada Lovelace, affirmative action, Alan Greenspan, Albert Einstein, assortative mating, barriers to entry, Bernie Sanders, Black Lives Matter, Bletchley Park, borderless world, Boris Johnson, Brexit referendum, business intelligence, central bank independence, circulation of elites, Clayton Christensen, cognitive bias, Corn Laws, coronavirus, corporate governance, correlation coefficient, COVID-19, creative destruction, critical race theory, David Brooks, Dominic Cummings, Donald Trump, Double Irish / Dutch Sandwich, Etonian, European colonialism, fake news, feminist movement, George Floyd, George Gilder, Gini coefficient, glass ceiling, helicopter parent, Home mortgage interest deduction, income inequality, intangible asset, invention of gunpowder, invention of the printing press, Isaac Newton, Jeff Bezos, Jeremy Corbyn, Jim Simons, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, land tenure, London Interbank Offered Rate, Long Term Capital Management, Louis Pasteur, Mahatma Gandhi, Mark Zuckerberg, means of production, meritocracy, meta-analysis, microaggression, mortgage tax deduction, Myron Scholes, offshore financial centre, opioid epidemic / opioid crisis, Panopticon Jeremy Bentham, Peter Thiel, plutocrats, post-industrial society, post-oil, pre–internet, public intellectual, publish or perish, Ralph Waldo Emerson, RAND corporation, rent-seeking, Richard Florida, Ronald Reagan, scientific management, sexual politics, shareholder value, Sheryl Sandberg, Silicon Valley, spinning jenny, Steve Bannon, Steven Pinker, supply-chain management, surveillance capitalism, tech bro, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thorstein Veblen, three-martini lunch, Tim Cook: Apple, transfer pricing, Tyler Cowen, unit 8200, upwardly mobile, Vilfredo Pareto, W. E. B. Du Bois, wealth creators, women in the workforce

By 2014, there were nearly 1.5 million workers from Central and Eastern Europe living in the UK.9 A succession of corporate disasters and scandals raised questions about the cult of pure intelligence. Long-Term Capital Management, a hedge fund, was supposed to be the perfect advertisement for brainpower, including the Nobel Prize-winning duo Myron Scholes and Robert Merton on its board. But in 1998 it made such a catastrophically wrong bet that the Federal Reserve had to organize a rescue. Enron famously prided itself on being run by ‘the smartest guys in the room’. Jeff Skilling, one of the company’s leading architects, was a product of the two great engines of the modern meritocracy – Harvard Business School and McKinsey.

Lenin Institute for Brain Research 229 Safire, William 335 St Paul’s School 104 Saint-Simon, Henri de 137–8 sale of offices 52–3 Salisbury, Robert (‘Bobbety’) Cecil, Marquess of 32, 157, 162 Samuels, David, The Runner 8 Sandberg, Sheryl 343–4 Sandel, Michael 9–10 The Tyranny of Merit 7, 370 Sanders, Bernie 337, 346 Saunders, Peter 4, 373 Savio, Mario 296–7 Scalia, Antonin 292 Scandinavia 368 Schlafly, Phyllis 273 Schlegel, Friedrich 141 Schmidt, Benno 370 Schmidt, Eric 308 scholarships 103, 166–7, 245–9 bonded (repaid by public service) 350, 354, 379 proposal for national 379 Singapore 350, 353–4, 379 Scholes, Myron 338 schools admissions policies 303–5 competition for admissions 313–15 comprehensive 170–71, 174, 295–6, 323–4 and cramming 314–15, 365–6 direct grant 236–7 elite American 198, 202, 303–5 and English 11-plus 216–20 kindergartens 313 open-access admissions 370 Protestant mass system 112 and sponsored mobility 102–3, 104 streaming by ability 299, 353 varied types of 378 see also education; grammar schools; public schools Schumpeter, Joseph 229 Schwab, Karl 320 science post-war rise of 235, 239 women in 310 Science Museum, South Kensington 211 Scipio 108–9 Scotland cult of common man 145, 149 literacy rate 149 Scott, Charlotte 268 Second World War 20 and mass mobilization 234 and post-war changes 234–7, 238–45, 248–9, 272–3 women and 272 Sedgwick, Theodore 190 self-government, and city-states 104–6 self-improvement 371 African-American movement 199–200 British working-class movement 172–3, 328 self-interest 188 and good of society 146 self-reliance, United States 176–7 service economy 343 Shakespeare, William 29, 34 Hamlet 259 Troilus and Cressida 25 Shaw, George Bernard 172, 213 Shelley, Mary 266 Shelley, Percy Bysshe 141 Shockley, William 221 Shrewsbury School 104 Shurkin, Joel, ‘Tracking the IQ Elite’ 222 Sidgwick, Henry 152, 267–8 Silicon Valley 223 Simon, Brian 281–2 Simon, Théodore 209 Simons, Jim 3 Singapore 2, 22, 367–8 authoritarianism 354 civil service 363 commitment to meritocracy 350–55 democracy in 351 downside of meritocracy 354–5 economic model 350, 355 education 4, 353–4 marriage debate 351 Nanyang Technological University 350 National University 350 political leadership 361 Raffles College 353–4 Singer, William ‘Rick’ 315–16 Sixtus IV, Pope 47 Skilling, Jeff, Enron 338 skulls collected by researchers 207–8 measurement of 261 slavery in America 179, 192–3 emancipation 193, 263 see also African-Americans Slezkine, Yuri 88 Sloan, Melanie 319 ‘smart’ (American term) 2–3 Smiles, Samuel 205 Self-Help 163 Smith, Adam 54 on self-interest 146 The Wealth of Nations 149 Smith, Greg, Goldman Sachs 338 Smith, Melancton 188 Smith, Sir Thomas 110 Snow, C.


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Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Albert Einstein, anti-communist, asset allocation, Bear Stearns, beat the dealer, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bletchley Park, Brownian motion, buy and hold, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, Henry Singleton, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, junk bonds, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Michael Milken, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, Teledyne, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

Still, Samuelson didn’t see any convincing evidence that such people existed. You might compare his position to that of a present-day “skeptic society” on psychics or UFOs. Samuelson challenged the hotshot money managers to prove their superior abilities. Fama and other economists such as Jack Treynor, William Sharpe, Fischer Black, and Myron Scholes earnestly tried to find investors or investment techniques that really and truly beat the market. It seemed that (like other practitioners of the paranormal) superior portfolio managers had a convenient habit of touting their successes and forgetting their failures. In the majority of cases, claims of beating the market evaporate when subjected to scrutiny.

Samuelson encouraged Merton to tackle the still-unsolved problem of pricing options. Samuelson had worked on this problem himself and had come close to a solution. He sensed that Merton might be the one to succeed. Other people at MIT were working on the problem. Merton soon became aware of the work of MIT’s Myron Scholes and Fischer Black, then employed at the consulting firm of Arthur D. Little. Merton reasoned that the “correct” price for options is the one where no one can make a profit by buying them or selling them short. This is the assumption of “no arbitrage.” From this, and the assumption that stock prices move in a geometric random walk, Merton derived Black and Scholes’s pricing formulas.

Meriwether did not himself possess a first-rate mathematical mind. Instead, he recruited the top academic talent. No finance professor was more respected than Robert C. Merton. Merton had consulted for Salomon Brothers, so Meriwether already knew him. He agreed to come on board. Meriwether’s other great coup was recruiting Myron Scholes. As journalist Roger Lowenstein said, that was like putting Michael Jordan and Muhammad Ali on the same team. Thorp decided not to put any of his money in the fund. He was concerned that Merton and Scholes, brilliant as they were, had little experience investing other people’s money. It didn’t help that Merton was second only to Samuelson as a critic of the Kelly criterion.


pages: 338 words: 106,936

The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall

Alan Greenspan, Albert Einstein, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Apollo 11, Asian financial crisis, bank run, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, butterfly effect, buy and hold, capital asset pricing model, Carmen Reinhart, Claude Shannon: information theory, coastline paradox / Richardson effect, collateralized debt obligation, collective bargaining, currency risk, dark matter, Edward Lorenz: Chaos theory, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, Financial Modelers Manifesto, fixed income, George Akerlof, Gerolamo Cardano, Henri Poincaré, invisible hand, Isaac Newton, iterative process, Jim Simons, John Nash: game theory, junk bonds, Kenneth Rogoff, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Market Wizards by Jack D. Schwager, martingale, Michael Milken, military-industrial complex, Myron Scholes, Neil Armstrong, new economy, Nixon triggered the end of the Bretton Woods system, Paul Lévy, Paul Samuelson, power law, prediction markets, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk-adjusted returns, Robert Gordon, Robert Shiller, Ronald Coase, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical arbitrage, statistical model, stochastic process, Stuart Kauffman, The Chicago School, The Myth of the Rational Market, tulip mania, Vilfredo Pareto, volatility smile

Today, Fischer Black is one of the most famous figures in the history of finance. His most important contribution, the Black-Scholes (sometimes Black-Scholes-Merton) model of options pricing, remains the standard by which all other derivatives models are measured. In 1997, Black’s collaborators, Myron Scholes and Robert Merton, were awarded the Nobel Prize in economics for the Black-Scholes model. Black had died in 1995 and so was ineligible for the prize (the Nobel is never awarded posthumously), but in a rare nod, the Nobel committee explicitly acknowledged Black’s contribution in its announcement of the award.

Black set out to learn everything that Treynor knew about finance, so that when Treynor left ADL, just a year after he and Black first met, Black was the natural person to take Treynor’s place on ADL’s financial consulting team — and further perfect Treynor’s model. CAPM would form the foundation for virtually all of the work Black would go on to do. If Jack Treynor initiated Black’s transformation into a financial economist, Myron Scholes brought it to fruition. Scholes arrived in Cambridge in September 1968, a fresh doctorate from the University of Chicago in hand. A fellow graduate student in Chicago, Michael Jensen, had recommended that Scholes look up Black — an “interesting fellow,” in Jensen’s estimation. Scholes called soon after arriving in Cambridge.

In other words, the models that were supposed to make these products risk-free for their manufacturers failed, utterly. Models have failed in other market disasters as well — perhaps most notably when Long-Term Capital Management (LTCM), a small private investment firm whose strategy team included Myron Scholes among others, imploded. LTCM had a successful run from its founding in 1994 until the early summer of 1998, when Russia defaulted on its state debts. Then, in just under four months, LTCM lost $4.6 billion. By September, its assets had disappeared. The firm was heavily invested in derivatives markets, with obligations to every major bank in the world, totaling about $1 trillion.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Boeing 747, book value, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, Eyjafjallajökull, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, junk bonds, Kenneth Rogoff, lateral thinking, Lewis Mumford, London Whale, Long Term Capital Management, market bubble, Michael Milken, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, proprietary trading, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, scientific management, subprime mortgage crisis, tail risk, technology bubble, TED Talk, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

., February 27, 1998, available at http://www.berkshirehathaway.com/letters/1997.html. 19 They start with the assumption that: Carolyn Kousky and Roger Cooke, “Explaining the Failure to Insure Catastrophic Risks,” The Geneva Papers 37 (2012): 206–227. 20 Hayne Leland, a professor: Hayne E. Leland and Mark Rubinstein, “The Evolution of Portfolio Insurance,” in Dynamic Hedging: A Guide to Portfolio Insurance, Don Luskin, ed. (Hoboken, N.J.: Wiley, 1988). 21 Around this time, Myron Scholes: Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (1973): 637–654. 22 to boost their returns: Leland and Rubinstein, “The Evolution of Portfolio Insurance,” 7. 23 By the eve of the October 1987 crash: Report of the Presidential Task Force on Market Mechanisms, Nicholas F.

But whereas regular insurance generally worked for uncorrelated risks, such as fire and death, stocks were highly correlated: they tended to go up and down together. This meant that the seller of that sort of insurance couldn’t rely on the premiums earned on stocks that didn’t go down to make up for losses on those that did. He needed a way to protect against the entire market going up or down. Around this time, Myron Scholes and Fischer Black, two academic economists, had devised a formula for valuing options. The formula contains several principal elements: the asset’s current price, the option’s strike price, the time until the option expires, interest rates, and volatility. These conditions help determine the premium you must pay an option seller.


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More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, deal flow, do well by doing good, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Jim Simons, John Bogle, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, machine translation, margin call, market bubble, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, Mary Meeker, merger arbitrage, Michael Milken, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, operational security, pattern recognition, Paul Samuelson, pre–internet, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule

But by 1988, when Asness arrived in Chicago, Fama was leading the revisionist charge: Along with a younger colleague, Kenneth French, Fama discovered non-random patterns in markets that could be lucrative for traders. After contributing to this literature, Asness headed off to Wall Street and soon opened his hedge fund. In similar fashion, the Nobel laureates Myron Scholes and Robert Merton, whose formula for pricing options grew out of the efficient-markets school, signed up with the hedge fund Long-Term Capital Management. Andrei Shleifer, the Harvard economist who had compared the efficient-market theory to a crashing stock, helped to create an investment company called LSV with two fellow finance professors.

As a rising star at Salomon Brothers in the mid-1980s, he had set out to transform the small trading group he managed into “a quasi-university environment.”3 Meriwether’s plan was to hire young stars from PhD programs and encourage them to stay in touch with cutting-edge research; they would visit finance faculties and go out on the academic conference circuit. He recruited Eric Rosenfeld, a Harvard Business School professor, then scooped up Larry Hilibrand, who had not one but two degrees from the Massachusetts Institute of Technology. By 1990 Meriwether’s team included Robert Merton and Myron Scholes, who would later win the Nobel Prize for their pioneering work on options pricing. In the mid-1980s, most Salomon partners had not gone to college, much less a PhD program.4 The personification of the firm’s trading culture was Craig Coats Jr., a tall, handsome, charismatic stud believed by many to be the model for the hero in Tom Wolfe’s The Bonfire of the Vanities.

A world in which a small brotherhood of academics could earn more than a large bank required a fresh kind of setup. It required “Salomon without the bullshit.”7 IN FEBRUARY 1994, MERIWETHER LAUNCHED LONG-TERM Capital Management. He brought along Eric Rosenfeld, Larry Hilibrand, Robert Merton, and Myron Scholes; in all, eight members of his Salomon brain trust joined in setting up the company. The professors leased space at 600 Steamboat Road in Greenwich, Connecticut, in the same four-story building overlooking the Long Island Sound to which Paul Tudor Jones had moved recently. Instead of New York suits and ties, they showed up for work in golf shirts and chinos.


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The Little Book of Hedge Funds by Anthony Scaramucci

Alan Greenspan, Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, financial engineering, fixed income, follow your passion, global macro, Gordon Gekko, high net worth, index fund, it's over 9,000, John Bogle, John Meriwether, Long Term Capital Management, mail merge, managed futures, margin call, mass immigration, merger arbitrage, Michael Milken, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, short squeeze, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule, Vanguard fund, Y2K, Yogi Berra, zero-sum game

But just as they were about to meet the leprechaun and his pot of gold at the end of the rainbow, it happened—Long-Term Capital Management (LTCM) collapsed in 1998 and was later rescued by the federal government. Founded in 1994 by a proprietary trading legend, John Meriwether from Solomon Brothers; two Nobel Prize-winning economists, Robert C. Merton and Myron Scholes; and a slew of finance wizards, LTCM used an arbitrage strategy that exploited temporary changes in market behavior. By pair trading and betting on price convergence over a range of scenarios (we’ll discuss those strategies in Chapter 7), the LTCM band of brothers leveraged their $4 billion fund until it had a notional exposure of over $1 trillion dollars.

A Word of Caution In the 1980s, Long-Term Capital Management (along with its legendary credit arbitrageur leader, John Meriwether) was one of the first hedge funds to quantify the estimate of the correlations among various trades and mathematically measure risk through a technique known as “value at risk.” Although we learned of LTCM’s eventual demise caused by hubris in Chapter 2, Meriwether, Robert Merton, and Myron Scholes helped facilitate the correlation model. Which brings me to an important note on correlations—as Warren Buffett famously said after the 2007–2009 crash, “Beware of geeks bearing formulas.” While correlation is a helpful tool in the market, security and portfolio analysis should never be overly reliant on formulas.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, blockchain, Boeing 747, Bonfire of the Vanities, Bretton Woods, Brexit referendum, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, driverless car, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, Glass-Steagall Act, global macro, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, low interest rates, machine readable, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Minsky moment, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, operational security, Paul Samuelson, Peace of Westphalia, Phillips curve, Pierre-Simon Laplace, plutocrats, prediction markets, price anchoring, price stability, proprietary trading, public intellectual, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stock buybacks, stocks for the long run, tech billionaire, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, We are all Keynesians now, Westphalian system

The firm was called Long-Term Capital Management. A coming-out announcement for LTCM appeared in The New York Times on September 5, 1993, under the headline “JOHN MERIWETHER RIDES AGAIN.” LTCM was based in Greenwich, Connecticut. In addition to Meriwether, the LTCM partners included two future Nobel Prize winners, Myron Scholes and Robert C. Merton, and a former vice chairman of the Federal Reserve Board, David Mullins Jr. Yet the talent went far beyond headline names like Scholes, Merton, and Mullins. Less well known, yet equally accomplished, was Alberto Giovannini, the Italian economist who led the technical design team that created the euro.

The first part was simply to give back money to the outsiders through a forced redemption. This was done as of December 31, 1997, with a $3 billion all-cash distribution. The redemption reduced LTCM’s capital to about $4 billion. LTCM partners personally owned about $2.6 billion of that capital with the remainder in third-party hands. The second part of the plan, led by Myron Scholes, involved an ingenious options strategy to control another $1 billion of the fund’s capital. LTCM persuaded UBS to sell the partners a seven-year, $1 billion at-the-money call option on their own fund. This option allowed the partners at any time from 1997 until 2004 to pay $1 billion to buy that amount of the fund plus performance on $1 billion from the day the option was sold.

Monetarism has been intellectually dominant for about sixty years since it emerged from the University of Chicago under Milton Friedman in the 1960s. Eugene Fama’s efficient markets hypothesis percolated in academic studies in the 1960s, yet only started to exert market influence in the 1970s with the options pricing model of Fischer Black, Myron Scholes, and Robert Merton. The Black-Scholes model enabled derivatives and leverage. David Ricardo’s theory of comparative advantage is two hundred years old, yet was first implemented in a widespread rules-based way after 1947 in the General Agreement on Tariffs and Trade. The link between money and gold was abandoned in stages from 1971 to 1973, concurrent with the rise of floating exchange rate regimes.


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Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, AOL-Time Warner, asset allocation, automated trading system, barriers to entry, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, equity risk premium, fault tolerance, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, information security, interest rate swap, invention of the telegraph, job automation, junk bonds, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, National best bid and offer, Nick Leeson, open economy, passive investing, pattern recognition, payment for order flow, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, proprietary trading, race to the bottom, random walk, Reminiscences of a Stock Operator, rent-seeking, risk free rate, risk tolerance, risk-adjusted returns, search costs, selection bias, shareholder value, short selling, short squeeze, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, vertical integration, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

I wish to acknowledge the following colleagues by name: Anat Admati Yacob Amihud Jim Angel Gail Belonsky Hank Bessembinder Bruno Biais Bernie Black Fischer Black Marshall Blume Michael Brennan Corinne Bronfman Mark Carhart Henry Cheeseman Kal Cohen Harry DeAngelo Linda DeAngelo Ian Domowitz Rob Engle Wayne Ferson Steve Figlewski Margaret Forster Doug Foster Jennie France Bill Freund Mendy Fygenson Stuart Gabriel Ann Gillette Tom Gilligan Larry Glosten Charles Goodhart Sandy Grossman Joe Grundfest Eitan Gurel Yasushi Hamao Puneet Handa Joel Hasbrouck Kaj Hedvall Pierre Hillion Craig Holden Kose John Charles Jones Avner Kalay Eugene Kandel Jon Karpoff Don Keim Laura Kodres Pete Kyle Josef Lakonishok Charles Lee Ruben Lee Bruce Lehmann Ken Lehn Marc Lipson Andy Lo Francis Longstaff Bob Lucas Craig MacKinlay Ananth Madhavan Steve Manaster Terry Marsh Tom Mclnish Haim Mendelson Morris Mendelson Bob Miller Mert Miller David Modest Dale Morse Belinda Mucklow Harold Mulherin Rob Neal Anthony Neuberger Maureen O’Hara Daniel Orr J. Peake André Perold Mitch Petersen Paul Pfleiderer Avri Ravid Mark Ready Jay Ritter Kevin Rock Ailsa Roell Tavy Ronen Ehud Ronn Mark Rubinstein Tony Saunders Myron Scholes Bob Schwartz Eduardo Schwartz Bill Schwert Duane Seppi Kuldeep Shastri Alan Shapiro Eric Sirri Sy Smidt Vernon Smith Chester Spatt Sanjay Srivastava Jim Stancill Laura Starks Dave Stewart Hans Stoll René Stulz Avanidhar Subrahmanyam Sheridan Titman Walt Torous Anand Vijh S.

Plots of random walks through time look like paths that wander up or down at random because random walks are completely unpredictable. * * * ▶ Fischer Black on Noise Fischer Black was a mathematician who made many seminal contributions to the development of financial theory. Perhaps most notably, he helped develop option-pricing theory, for which Myron Scholes and Robert Merton received the 1997 Nobel Prize in economic science. Had Fischer not died two years before the prize was awarded, he undoubtedly also would have been a Nobel laureate. In his 1985 presidential address to the American Finance Association, Black offered a now famous opinion about noise.

Petersburg paradox, 469 sales brokers, 147 sales traders, 324 Salomon Brothers, 28, 149 sample selection bias, 470–75 avoiding, 472–74 definition of, 471 in mutual fund industry, 472 regression to mean, 474 S&P 500 Index, 186, 249, 328, 353, 361, 450, 486, 490, 565, 577 San Francisco Stock and Bond Exchange, 47 SAXESS system, 526 scalable technology, 547 scalpers, 24, 279, 293 Scholes, Myron, 223 screen-based trading systems, 90, 99, 105, 107 Seagram Co. Ltd., 365–66 search engines, 396 seasoned issues, 316 seasoned securities, 39 SEC. See Securities and Exchange Commission secondary capital markets, 209, 211–12 secondary markets, 39 secondary precedence rules, 117, 536–38 secondary spread determinants, 312, 314–17 Securities and Exchange Commission (SEC), 60–61 and best execution, 518 competition with Commodity Futures Trading Commission, 63 functions of, 61 and insider trading, 585, 586 Order Handling Rules, 217 program trades, 489 Regulation FD, 451, 586 Rule 11Ac1-5/Ac1-6, 518 Securities Exchange Act, 61, 154 Securities Industry Automation Corporation, 98 securities information processor, 98 Securities Investor Protection Corporation (SIPC), 171 securities theft, 167–70 securitizing real estate, 40 security, 4 security registrar, 168 SEI (co.), 424 selective disclosure, 217 self-enforcing rule, 113 self-regulatory organization, 63–65 selling time, 309 sell side, 32, 33–34 sell uptick order, 81 semistrong-form efficient markets, 240 sentiment-oriented technical traders, 195, 196, 231, 245, 251, 252–54, 257 serial covariance, 434 settlement, 141, 142–43 settlement agents, 36 Shad, John, 63 Shanghai Stock Exchange, 52 shape of distribution, 467 shareholders, 46, 211, 212 sheep, 328 shipping arbitrage, 350, 351–53 shooting the moon, 256 shopping the block, 247, 324 short hedge, 349 short hedger, 349 short interest rebate, 155–57 short position, 32 short seller, 32, 169 side-by-side trading, 52 signaling, 90, 104, 108, 246 significance level, 454 silver, 164, 181 single-price auctions definition of, 94, 120 example of, 120–21 supply and demand, 121–22 trader surpluses, 122–25 and uniform pricing rule, 120–25 SIPC.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, benefit corporation, Black Swan, blood diamond, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, company town, compensation consultant, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Glass-Steagall Act, Gordon Gekko, Greenspan put, hiring and firing, Ida Tarbell, income inequality, independent contractor, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, Money creation, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, Paul Volcker talking about ATMs, pension reform, performance metric, Pershing Square Capital Management, pirate software, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, prosperity theology / prosperity gospel / gospel of success, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, rolling blackouts, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, stock buybacks, subprime mortgage crisis, The Chicago School, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

For their part, always thinking about money gives economists finely tuned financial antennae, and some from prominent universities wasted little time in seizing the opportunity to moonlight as advocates of deregulation. Milton Friedman and Alan Greenspan were not the only prominent economists whose reputation suffered greatly from the notion of market perfection. The bankruptcy of the hedge fund Long Term Capital Management in 1994 humiliated Myron Scholes and Robert Merton, both Nobel laureates and champions of flawed economic theory. Other academicians closely identified with Reaganomics, including Hubbard, Mankiw, and Martin Feldstein, became controversial as well.48 Europeans even have a name for them, calling such American economists “the secret lobbyists.”49 The economics profession owes you an apology for permitting Reagan and George W.

(Washington Post columnist), 30, 109 Sanders, William Gerard (professor), 142 Sapir, André, 366 Sauer, Stefan (journalist), 314 Sawhill, Isabel (Brookings), 133, 263, 296-300, 402-6 “say-on-pay” law, 461 Scheuer, Markus, 354 Schmitt, John (economist), 229, 340 Schnabel, Claus (economist), 172–73, 175 Schoar, Antoinette (economist), 156 Scholes, Myron (Nobel Laureate), 34 Schott, Peter K. (professor), 345 Schulz, Thomas, 3, 43, 154 Schumpeter, Joseph (economist), 84–85, 233, 243, 274, 309, 384, 416 creative destruction, 83–4 Schwartz, Emma (Center for Public Integrity), 19 Schwartz, Nelson (New York Times journalist), 111 Scott, Robert E.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fear index, fiat currency, financial engineering, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, Glass-Steagall Act, global macro, High speed trading, housing crisis, index fund, joint-stock company, junk bonds, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, military-industrial complex, money market fund, moral hazard, Myron Scholes, National best bid and offer, off-the-grid, passive investing, Ponzi scheme, power law, price discovery process, proprietary trading, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, short squeeze, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

In the end what was truly irrelevant was not the capital structure, but rather investors’ desire to study that structure. How does this affect the investment results? If it is just a preference by the clientele to go for dividends or growth, is there a clear winner? Ten years after Miller and Modigliani theorized about how the crowd acted, Fischer Black and Myron Scholes wrote “The Effects of Dividend Yield and Dividend Policy on Common Stock Prices and Returns.”3 They set out to look at the empirical evidence to put to rest the question of dividends or no dividends. After looking back at the performance of both groups of stocks, the conclusion was not what some had expected: “First, dividend yield does not have a consistent impact on expected return . . . second . . . expected return on the [higher yielding] portfolio, given its level of risk, will be lower than it might be with a better diversified portfolio.”

Notes 1. Graham, Benjamin. “A Conversation with Benjamin Graham.” Financial Analysts Journal 32, no. 5 (1976): 20–23. 2. Miller, Marton H., and Franco Modigliani. “Dividend Policy, Growth, and the Valuation of Shares.” The Journal of Business 34, no. 4 (1961): 411–433. 3. Black, Fischer, and Myron Scholes. “The Effects of Dividend Yield and Dividend Policy on Common Stock Prices and Returns.” Journal of Financial Economics 1, no. 1 (1974): 1–22. CHAPTER 12 The New Scam Most of you may already think our representatives in Congress are out of their minds. Representatives in Congress create new laws without being able to know the unintended consequences.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

addicted to oil, air freight, airline deregulation, Alan Greenspan, Albert Einstein, asset-backed security, bank run, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon tax, central bank independence, collateralized debt obligation, collective bargaining, compensation consultant, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, currency risk, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Glass-Steagall Act, Hernando de Soto, income inequality, income per capita, information security, invisible hand, Joseph Schumpeter, junk bonds, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, low interest rates, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, open immigration, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, Reminiscences of a Stock Operator, reserve currency, Right to Buy, risk tolerance, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, special economic zone, stock buybacks, stocks for the long run, Suez crisis 1956, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tipper Gore, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, We are all Keynesians now, working-age population, Y2K, zero-sum game

Hollywood could not have scripted a more dramatic financial train wreck. Despite its boring name, LTCM was a proud, high-visibility, highprestige operation in Greenwich, Connecticut, that earned spectacular returns investing a $125 billion portfolio for wealthy clients. Among its principals were two Nobel-laureate economists, Myron Scholes and Robert Merton, whose state-of-the-art mathematical models were at the heart of the firm's money machine. LTCM specialized in risky, lucrative arbitrage deals in U.S., Japanese, and European bonds, leveraging its bets with more than $120 billion borrowed from banks. It also carried some $1.25 trillion in financial derivatives, exotic contracts that were only partly reflected on its balance sheet.

., 361 n Roosa, Robert, 84 Roosevelt, Franklin Delano, 3 1 , 159, 246, 337, 431, 439 New Deal and, 2 1 , 30, 279, 504 Roosevelt, Theodore, 336 Roth, William, 92 Rove, Karl, 223 Royal Dutch Shell, 336, 339n, 438 Rubin, Robert, 7, 145, 146, 157-62, 170, 210, 220, 405 Asian contagion and, 188, 189-90, 195 budget surplus and, 185 Russian crisis and, 193 stock market and, 174-75, 179 Rubinomics, 161, 236 rule of law, 15, 16, 255-56, 297, 365, 396, 502 economic future and, 467, 468, 469-70, 503 in Europe, 277, 287 in Russia, 190, 327, 331-32, 500 Smith and, 261 in United States, 52, 278 Rumsfeld, Donald, 62, 64, 209, 210 Russia, 135-36, 139-40, 259, 275, 293, 310, 3 2 2 23, 334n debt default of, 190-96, 250, 328, 331 future of, 500 market capitalism in, 123-24, 139-40, 323-27, 503 oil and gas in, 190, 3 2 4 - 3 1 , 440, 443 oligarchs in, 139, 140, 190, 324, 326 property rights in, 139-40, 190, 327, 331-32, 389, 500 shock therapy in, 138—40 technology in, 3 3 1 , 388 see also Soviet Union Safire, William, 57 Sala-i-Martin, Xavier, 259n-60n Samuelson, Robert, 230 S&P 500, 207, 224, 426n, 465 Sao Tome and Principe, 258-59 Sarbanes, Paul, 154-55, 2 2 1 , 478 Sarbanes-Oxley Act (2002), 374, 430-31 Sarkozy, Nicolas, 288, 500 Saudi Arabia, 79-80, 334n, 351, 438n oil of, 79, 438n Saudi Aramco, 79, 439, 440, 442 savings, 12, 138, 185, 270, 348-52, 362, 369, 3 8 4 88, 4 7 8 , 4 9 9 cross-border, 348, 352, 484 in developing vs. industrialized countries, 13, 386, 484 domestic, current account balance and, 348—49, 350 excess of, 13-14 future standards of living and, 413 investment vs., 348-49, 385, 386-87 savings accounts, 114, 115 savings and loans (S&Ls), 6, 114-17, 290, 357n SBC Communications, 229 Scargill, Arthur, 283 Scholes, Myron, 193 527 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. INDEX Schubert, Franz, 298 Schumann, Robert, 20 Schumer, Chuck, 405 Schumpeter, Joseph, 48, 5 1 , 167, 174 science education, 399, 403, 405 Scotland, 2 6 0 - 6 1 , 265 Scowcroft, Brent, 65 Second Treatise of Civil Government (Locke), 252n Securities and Exchange Commission, 33, 257, 375, 431 Securities Industry and Financial Markets Association, 83 n Seevers, Gary, 64 Seidman, Bill, 116 self-interest, 256, 262, 368, 490 Sen, Amartya, 253 Senate, U.S., 7, 8, 64, 115, 156, 158, 199, 222, 223 Banking Committee of, 8, 10, 150, 239 Bentsen in, 144, 145^46 Budget Committee of, 70, 185, 217, 219 Clinton budget and, 148, 149 Ethics Committee of, 115 Republican control of 211 service economy, 173, 315, 4 0 1 , 470 Shanghai, 2 9 8 , 3 0 1 , 3 0 8 Shaw, Artie, 23, 27 Sheiner, Bill, 26 Shevardnadze, Eduard, 135 Shultz, George, 9 1 , 92-93, 312 Siegman, Charlie, 189 Siemens, 381 silicon, 11,12 Silicon Valley, 127, 164, 167, 181, 271, 504 Silva, Luiz Inacio Lula da, 340, 341 Silva, Mario (Murray Goldsmith), 20 Simon, Bill, 67, 91 Simons, James, 405 Singapore, 13, 188, 253, 275, 276, 311, 312 education in, 399, 400 Singh, Manmohan, 318-19, 321-22 Sitaryan, Stepan, 128, 129, 130 skilled workers, shortage of, 3 9 9 ^ 0 0 , 404-7, 409, 413,505 Skilling, Jeffrey, 423 Skinner, Richard Dana, 44 Smith, Adam, 10, 250n, 257, 260-66, 276, 370, 502 invisible hand of, 15, 89, 262, 325, 367, 488 Smith, John, 283 Snow, John, 238, 241 Snowe, Olympia, 222 socialism, 126, 130-31, 139, 141, 252, 272, 281, 300 in China, 295 Fabian, 264-65, 266, 283-84, 317, 480, 499, 501 in India, 265, 316-19, 382, 501 social safety nets, 13, 272, 305, 4 8 1 , 504 in Europe, 276-77, 2 8 0 - 8 1 , 283, 285, 286, 291 Social Security, 109, 143, 146-47, 237, 280, 41 In, 412-14,415-19,504 budget surplus and, 185, 186, 215 defined-benefit plans vs., 421-22 indexing of, 94, 125 "lockboxes" and, 417 reform of, 94-96, 211, 215, 217, 218, 220, 241 Social Security Board of Trustees, 411 "soft landing," use of term, 155-56, 163 software, 164, 169, 493-94, 495 solar power, 453 Solidarity, 125, 132 Solomon, Claire, 23 Solow, Robert, 474 Song of Love, 20 Sonthi Boonyaratglin, 313 South Korea, 13, 188-89, 190, 260, 334n China compared with, 384, 477 Soviet bloc, former, 132, 309, 326 market capitalism and, 12, 502 Soviet Union, 40, 88-89, 122, 123-31, 134-41, 182,251,281,298,300,333 AG's travels to, 119, 123-30, 135-37, 190 arms race and, 129-30 collapse of, 8, 12,40, 123-24, 135-41, 161, 190, 250, 259, 275, 315, 329, 365, 366, 382 food shortages in, 126, 136 military of, 136, 137 nuclear power in, 453 nuclear weapons of, 8, 34 in space race, 155 as superpower, 137 transition to market economy in, 136-39 see also Russia space race, 155 Spain, 273, 351 specialization, 262, 502 U.S. current account deficit and, 347, 353, 356, 359, 361 Spencer, Herbert, 278-79 Sperling, Gene, 158, 170, 182-83, 186 stabilization fund, 259, 330 stagflation, 6 0 - 6 1 , 72 Stalin, Joseph, 126, 127, 281, 299, 504 Standard Oil of New Jersey, 336, 438 Standard Oil trust, 444 standards of living, 13, 256, 257, 259n-60n, 265, 275,335,337,356,391 central planning and, 127 in China, 251, 297, 299 competition and, 268-69, 3 9 2 - 9 6 democracy and, 332 in East Asia, 3 1 3 , 3 1 5 in East vs.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

Alan Greenspan, American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business cycle, business logic, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency risk, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Glass-Steagall Act, Gordon Gekko, greed is good, Greenspan put, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, junk bonds, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, Martin Wolf, Michael Milken, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, Savings and loan crisis, sovereign wealth fund, Tax Reform Act of 1986, The Myth of the Rational Market, too big to fail, transaction costs, Tyler Cowen, value at risk, yield curve

At the time, a movement was growing in the halls of America’s leading universities that would help transform the financial sector. This movement was the discipline of academic finance, pioneered by economists such as Paul Samuelson, Franco Modigliani, Merton Miller, Harry Markowitz, William Sharpe, Eugene Fama, Fischer Black, Robert Merton, and Myron Scholes, most of whom went on to win the Nobel Prize. These scholars brought sophisticated mathematics to bear on such problems as determining the optimal capital structure of a firm (the ratio between debt and equity), pricing financial assets, and separating and hedging risks.40 Academic finance had a tremendous impact on the way business is done around the globe.

Investments can be economically value-creating or value-destroying; when financial intermediation increases to the point where value-destroying investments are being funded, financial innovation is doing more harm than good. But in the 1990s and 2000s, the theory of risk unbundling and diversification reigned largely unchallenged in Washington; people who didn’t subscribe to it could be written off as ignoramuses who failed to understand the elegance of modern finance. Merton and his colleague Myron Scholes, after all, won the Nobel Prize in economics in 1997 (a year before the collapse of their hedge fund). It also helped that financial services were one arena where U.S. firms were in the international vanguard, inventing most of the new products and markets of the past few decades. With the trade deficit in manufactured goods widening continuously, structured securities were one of our most attractive exports, especially to European banks and investors looking for higher-yield investments.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

And if markets were efficient—in other words, if people like Meriwether did their job—then the prices of futures contracts should be mathematically related to the underlying asset using “no-arbitrage” principles. Bending Reality to Match the Textbook The next leg of my U.S. trip took me to Boston and Connecticut. There I met two more Nobel-winning finance professors—Robert Merton and Myron Scholes—who took Miller’s idea to its logical conclusion at a hedge fund called Long-Term Capital Management (LTCM). Scholes had benefited directly from Miller’s mentorship as a University of Chicago PhD candidate, while Merton had studied under Paul Samuelson at MIT. What made Merton and Scholes famous (with the late Fischer Black) was their contemporaneous discovery of a formula for pricing options on stocks and other securities.

What started out as an arcane twist of high finance—derivatives—has now corrupted the entire financial world, and has set a hellish trap for taxpayers and their representatives that offers no way out. Appendix A timeline of some significant historical events referred to in the book, and episodes involving the book’s key characters. 1973 Fischer Black, Myron Scholes, and Robert Merton publish seminal papers on option pricing 1974 Robert Merton publishes paper using option theory to link debt and equity 1986 Start of S&L crisis 1987 Oldrich Vasicek publishes working paper applying Merton’s work to credit portfolios Federal Reserve protects Wall Street securities firms from October stock market crash by ensuring that banks lend 1988 Basel I bank capital accord agreed Nick Sossidis and Stephen Partridge-Hicks set up Alpha Finance for Citibank 1994 VAR models protect commercial banks from market turmoil 1995 Barings Bank almost bankrupted by Nick Leeson’s rogue trading Sossidis and Partridge-Hicks set up Sigma 1996 Basel Committee agrees to incorporate VAR-based trading book rules into bank capital accord Citibank launches Centauri SIV Moody’s binomial expansion technique CDO rating model published 1997 J.P.


pages: 651 words: 180,162

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

"World Economic Forum" Davos, Air France Flight 447, Alan Greenspan, Andrei Shleifer, anti-fragile, banking crisis, Benoit Mandelbrot, Berlin Wall, biodiversity loss, Black Swan, business cycle, caloric restriction, caloric restriction, Chuck Templeton: OpenTable:, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, fail fast, financial engineering, financial independence, Flash crash, flying shuttle, Gary Taubes, George Santayana, Gini coefficient, Helicobacter pylori, Henri Poincaré, Higgs boson, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, Jim Simons, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, language acquisition, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, Mark Spitznagel, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, Post-Keynesian economics, power law, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, Rupert Read, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, synthetic biology, tacit knowledge, tail risk, Thales and the olive presses, Thales of Miletus, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

George Martin and I listed all the major financial economists who were involved with funds, calculated the blowups by funds, and observed a far higher proportional incidence of such blowups on the part of finance professors—the most famous one being Long Term Capital Management, which employed Fragilistas Robert Merton, Myron Scholes, Chi-Fu Huang, and others. CHAPTER 15 History Written by the Losers The birds may perhaps listen—Combining stupidity with wisdom rather than the opposite—Where we look for the arrow of discovery—A vindication of trial and error Because of a spate of biases, historians are prone to epiphenomena and other illusions of cause and effect.

Consider our ingratitude to those who got us here, got our disrespect, and do not even know that they were heroes. 1 According to David Edgerton, the so-called linear model was not believed in much in the early twentieth century; it is just that we believe now that we believed then in the supremacy of teleological science. 2 We also figured out that two fragilistas, Myron Scholes and Robert Merton, got the Memorial Prize in Economics called “Nobel” for the packaging of a formula that other people discovered in much more sophisticated form before them. Furthermore, they used fictional mathematics. It is quite unsettling. 3 I remind the reader that the bone in Book IV is teleology and sense of direction, and while this is largely skeptical of formal academia (i.e. anti-universities), this is staunchingly anti-pseudoscience (or cosmetic science) and ultra-pro-science.

Further, how money is not spent on speculative research, but on “safe” bets with regular drugs, Light and Lexchin (2012). Contradicting studies: Kahneman brought to my attention studies such as Malmendier and Tate (2008, 2009) showing managers investing more than needed in their companies, hence excess skin in the game as a result of overconfidence. Myron Scholes and Robert Merton had investments in LTCM. Indeed—but overall the free option dominates (just measure the aggregate payment of managers relative to gains by shareholders). There are “fools of randomness” and “crooks of randomness”; we often observe a combination. (Credit: Nicolas Tabardel.) Asymmetries and extractive: Acemoglu and Robinson (2012) discusses an asymmetry with their notion of extractive economic institutions and environment, in which someone gets rich at the expense of someone else, the opposite of the convex collaborative framework in which one’s wealth leads to a compounding pie.


The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

Alan Greenspan, asset allocation, buy and hold, corporate governance, diversification, diversified portfolio, index fund, John Bogle, market fundamentalism, money market fund, Myron Scholes, PalmPilot, passive investing, prediction markets, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund, zero-sum game

Su Asset Allocation Questionnaire retirement plans (RRPs and RRSPs) ETFs in, 139-40, 169-70 Risk and Return Summary, 179-80 Risk Assessment Score (RAS), 17S--78 Ser also Asset Allocation Questionnaire risk management about risk management, 41 about asset allocation and, 40-41,70-72, 121 - 22 abo ut investment portfolios, 122-23 buying on margin and, 77-78 ETI;s and, 86-87 international stocks and, 130-31,169 prospectus information on risks,60 research on, 162--63 risk return comparison (chart), 14, 74-76 standard deviation to measure risk, 67--68, 85, 126, 138 Su also asset allocation; investment portfolios Rodgers, Kelly, 161 Ross, Ron, 132, 136 RRPs and RRSPs, ETFs in, 139-40, 169-70 Samuelson, Paul A., 107, 163 Sanford, Jeff, 164 Savings-Age Score (SAS), 172-73 Srr also Asset Allocation Questionnaire Scholes, Myron S., 107 Schwab, C harles, 59 Securities Exchange Commission (U.S .), 163 securities industry about the industry, 8-9 analyst fraud in, 39-40, ISS broker/client trust issues, 37, 39-41 , 98-101 ,138, J55, 168 disadvantages of use of, 149-50, ISS-56 house funds, 77-78, 163 myths of, 3-4, 9, 12, 146 qualifications of advisors, 42-43,52 regulation of, 82, 14 1-42, 164, 165, 170 U.S. brokers in Canada's industry, 119, 152 U.S.lCanada similarities, xi-xii Su also financial media; market timing {predicting the future}; stock and fu nd picking Sharpe, William E, 13, 34, 107 Siegel, Jeremy, 73 Simon, Scott, 148 Singer, Brian D., 121 , 162 Index 193 Sinha, Rajceva, 51, 107, 151 Sinquefield, Rex, 145 "sizzle" in H yperactive Trwestor, 32-33 small cap stocks, 113-14 Smart Investo rs about being a Smart Investor, 18-19,75, 144 benefits of being a, 6, 25, 137 books for, 93,152, 181-82 fa mous investors as, 107-9, 168 institutional investors as, 89, 105-7.114,168 percent of all trades, 138 See auo ETFs (exchange traded fu nds); Four-Step Process for Smart Investors; index funds; ris k management Smarr Investor Advisors contact with investors, 133 DFAas, 11 2-14, 168 for large investors, 89 for risk management, 40 when to use an advisor, 114 Smith Barney ho use funds, 77, 163 S&P 500 ETF, 15 S&P 500 Index, 15, 24 S&P Composite Index (U.S.), 29,45, 151 S&prrSX Composite Index about S&PfT'SX composite index, 23-24 standard deviation and risk, 68 use as a benchmark, 46, 83, 135 speculative investing and gambling, 30-3 1,153-54 Spinet, Eliot L, 39, 40 standard deviation, as risk measurement, 67-68, 85, 126, 138 State Street Global Advisors, 106 Stiglin, Joseph E., 163 stocks about stocks, 13-14, 84-87 as asset class, 13,40, 71, 121 buying on margin, 77-78 earnings per share (EPS), 14 international stocks, 19, 130-3 1, 169 prospectus for a stock, 60 risk and, 122-23 risk return comparison (chart), 14, 74-76 small-cap stocks, 113-14 standard deviation to measure price fluctuations, 67-68, 85,126, l38 U.S. stocks. 19, 119, 160 value stocks, 84-87, 114 Su also investment portfolios stock and fu nd picking about stock picking, 6-7, 17, 51-54 COSts and fees, 27-28, 35 decline of, 109-10, 149-50, 168 as desire for order, 31 myths of,}-4, 37, 70,146 research on, 53, 168 stock brokers.


pages: 153 words: 12,501

Mathematics for Economics and Finance by Michael Harrison, Patrick Waldron

Brownian motion, buy low sell high, capital asset pricing model, compound rate of return, discrete time, incomplete markets, law of one price, market clearing, Myron Scholes, Pareto efficiency, risk tolerance, riskless arbitrage, short selling, stochastic process

INVESTMENT ANALYSIS 137 Chapter 7 INVESTMENT ANALYSIS 7.1 Introduction [To be written.] 7.2 Arbitrage and the Pricing of Derivative Securities 7.2.1 The binomial option pricing model This still has to be typed up. It follows very naturally from the stuff in Section 5.4. 7.2.2 The Black-Scholes option pricing model Fischer Black died in 1995. In 1997, Myron Scholes and Robert Merton were awarded the Nobel Prize in Economics ‘for a new method to determine the value of derivatives.’ See http://www.nobel.se/announcement-97/economy97.html Black and Scholes considered a world in which there are three assets: a stock, whose price, S̃t , follows the stochastic differential equation: dS̃t = µS̃t dt + σ S̃t dz̃t , where {z̃t }Tt=0 is a Brownian motion process; a bond, whose price, Bt , follows the differential equation: dBt = rBt dt; and a call option on the stock with strike price X and maturity date T .


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Alan Greenspan, Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, behavioural economics, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buttonwood tree, buy and hold, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial engineering, financial innovation, full employment, Great Leap Forward, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Norman Macrae, Paul Samuelson, Philip Mirowski, Post-Keynesian economics, probability theory / Blaise Pascal / Pierre de Fermat, prudent man rule, random walk, Richard Thaler, Robert Shiller, Robert Solow, spectrum auction, statistical model, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

The puzzle was finally solved in the late 1960s by an odd threesome, none of whom was yet thirty years old when their collaboration began.' Fischer Black was a physicist-mathematician with a doctorate from Harvard who had never taken a course in economics or finance. He soon found his scientific academic studies too abstract for his taste and went to work at the Boston-based management consulting firm of Arthur D. Little. Myron Scholes had a fresh Ph.D. in finance from the Graduate School of Business at the University of Chicago, to which he had fled to escape his family's publishing enterprise; he had just joined the MIT faculty. Robert C. Merton, whose first published paper was titled "The `Motionless' Motion of Swift's Flying Island," had received a B.S. degree in mathematical engineering at Columbia but was teaching economics at MIT as an assistant to Samuelson and was as yet without a Ph.D.

A passionate believer in free markets, Black decided to apply Treynor's ideas to the valuation of options, and, to help himself along, he took Treynor's advice to join a Thursday evening finance workshop at MIT. Three years later, Black was still staring at equations that refused to produce an answer. Treynor's analysis of how market fluctuations influence the valuation of individual securities simply did not fit the bill. At that point, Black recalls, "Myron Scholes and I started working together." They had met each other at the Thursday evening workshops, where Black discovered that Scholes had been frustrated in taking the same approach to the same problem. The more they worked together over their equations, the clearer it seemed that the answer had nothing to do with Treynor's models of risk and reward.


pages: 493 words: 132,290

Vultures' Picnic: In Pursuit of Petroleum Pigs, Power Pirates, and High-Finance Carnivores by Greg Palast

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", anti-communist, back-to-the-land, bank run, Berlin Wall, Bernie Madoff, British Empire, capital asset pricing model, capital controls, centre right, Chelsea Manning, classic study, clean water, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, disinformation, Donald Trump, energy security, Exxon Valdez, Glass-Steagall Act, invisible hand, junk bonds, means of production, Myron Scholes, Nelson Mandela, offshore financial centre, Pepto Bismol, random walk, Ronald Reagan, sensible shoes, Seymour Hersh, transfer pricing, uranium enrichment, Washington Consensus, Yogi Berra

No more picking stocks, a fool’s errand. Financial rewards would be small, but risk would vanish. The world’s financial panics would be left to history, and all economic booms and busts smoothed into calm waves. I met Black not long after he’d put this Drunk’s Random Walk into an academic paper with his friend Myron Scholes. They called it the Capital Asset Pricing Model.19 About the same time, a newly expanding investment bank, a small house on the edge of the financial universe, Goldman Sachs, also fell in love with Dr. Black’s Magic Model, and hired all his best students and, eventually, Dr. Black himself. Black’s magic crew at Goldman looked at the stock market but, instead of seeing securities, saw simply a soup of financial molecules, which could be manipulated and sliced and rejoined in strange and wonderful combinations.

While panicked regulators watched the explosion with fear, Clinton’s Treasury Secretary, Robert Rubin, who’d come from Goldman Sachs, saw only one new world, a post-industrial America. The USA would “manufacture” and sell financial “products,” while we would leave the dull manufacturing of objects to China. In 1997, with the world’s stock markets climbing through the clouds, Myron Scholes received the Nobel Prize for the Black-Scholes Model. The committee could not honor Black, my guide to the Brave New Numerology, who had died of throat cancer years earlier. Then the rains came. How could my master Black have gotten it so horrifically wrong? He had slipped on the banana peel dropped by Milton Friedman.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

The price of an option is generally a reflection of market interest rates, the time to maturity, the closeness of the price of the underlying asset to its strike price, and that underlying asset's historical price volatility. Higher interest rates, a longer time to maturity, and greater volatility tend to raise prices. In the 1970s, Fischer Black and Myron Scholes developed an options pricing formula that has become a classic; it's been tinkered with over the years, but their fundamental technique remains canonical. from 1,300% returns to the sidewalk Put- and call-buying is fairly simple. Things do get more complicated, much more complicated. An owner of 100 shares of IBM can sell a call against those shares; should the price rise, he or she would have to buy back the call at a loss — the loss being partly offset by the (paper) rise in the value of the underlying shares — or run the risk of having the stock "called INSTRUMENTS away" by the fortunate buyer of the call.

"Hostile Takeovers in the 1980s: The Return to Corporate Specialization," Brookings Papers on Economic Activity: Microeconomics, pp. 1-85. Bilello, Suzanne (1992). "Free-Trade Pact Stirs Emotions," New York Newsday, August 7. Black, Fisher (1986). "Noise," Journal of Finance i\ (July), pp. 529-543. Black, Fisher, and Myron Scholes (1973). "The Pricing of Options and Corporate Liabilities," Journal of Political Economy d>\, pp. 637-654. Blair, Margaret M, ed. (1993). The Deal Decade: What Takeovers and Leveraged Buyouts Mean for Corporate Governance C^diShmgion: Brookings Institution). — (1995). Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century V^zshm^ion: Brookings Institution).


pages: 511 words: 151,359

The Asian Financial Crisis 1995–98: Birth of the Age of Debt by Russell Napier

Alan Greenspan, Asian financial crisis, asset allocation, bank run, banking crisis, banks create money, Berlin Wall, book value, Bretton Woods, business cycle, Buy land – they’re not making it any more, capital controls, central bank independence, colonial rule, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, Deng Xiaoping, desegregation, discounted cash flows, diversification, Donald Trump, equity risk premium, financial engineering, financial innovation, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, hindsight bias, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, if you build it, they will come, impact investing, inflation targeting, interest rate swap, invisible hand, Japanese asset price bubble, Jeff Bezos, junk bonds, Kickstarter, laissez-faire capitalism, lateral thinking, Long Term Capital Management, low interest rates, market bubble, mass immigration, means of production, megaproject, Mexican peso crisis / tequila crisis, Michael Milken, Money creation, moral hazard, Myron Scholes, negative equity, offshore financial centre, open borders, open economy, Pearl River Delta, price mechanism, profit motive, quantitative easing, Ralph Waldo Emerson, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, savings glut, Scramble for Africa, short selling, social distancing, South China Sea, The Wealth of Nations by Adam Smith, too big to fail, yield curve

Hilibrand, for example, collected a US$23m pay check in 1991 for the profits he generated. Together the partners accounted for more than a third of the firm’s capital. They were among Wall Street’s stars. Robert Merton is a Harvard Business School economist who won the Nobel Prize for economics last year with Myron Scholes for work in valuing options. Well there are three potential scenarios which would explain this little local difficulty. Each has radically different consequences for global markets. 1) The fund is suffering the natural consequences from too much gearing in a bad market. The consequences for the markets from this are bad but not terrible.

It was also clear, following Greenspan’s adjustment in monetary policy to save an over-leveraged hedge fund, that operating with ever higher amounts of debt was safer than previously thought. The policy choices in Asia and the United States in response to the first major deflationary crisis of the post-world war two period had built the foundations for the age of debt. I also later met Myron Scholes when we both spoke at an investment conference in Frankfurt. I spoke on financial history and he listened and we discussed the presentation. We both stayed for the gala dinner afterwards, not knowing that the main entertainment was 45 minutes of stand-up comedy – in German. A few days later he asked me by email why I thought financial history was a science and I replied that it wasn’t.


pages: 195 words: 63,455

Damsel in Distressed: My Life in the Golden Age of Hedge Funds by Dominique Mielle

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", activist fund / activist shareholder / activist investor, airline deregulation, Alan Greenspan, banking crisis, Bear Stearns, Black Monday: stock market crash in 1987, blood diamond, Boris Johnson, British Empire, call centre, capital asset pricing model, Carl Icahn, centre right, collateralized debt obligation, Cornelius Vanderbilt, coronavirus, COVID-19, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, family office, fear of failure, financial innovation, fixed income, full employment, glass ceiling, high net worth, hockey-stick growth, index fund, intangible asset, interest rate swap, John Meriwether, junk bonds, Larry Ellison, lateral thinking, Long Term Capital Management, low interest rates, managed futures, mega-rich, merger arbitrage, Michael Milken, Myron Scholes, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, offshore financial centre, Paul Samuelson, profit maximization, Reminiscences of a Stock Operator, risk free rate, risk tolerance, risk-adjusted returns, satellite internet, Savings and loan crisis, Sharpe ratio, Sheryl Sandberg, SoftBank, survivorship bias, Tesla Model S, too big to fail, tulip mania, union organizing

I turned to my team (all men), who were dead silent, studiously absorbed in taking notes. A conundrum indeed. Should they speak up on my behalf, thereby implying that I needed the support of men actually working for me? Or should they pretend they did not have a dog in this fight? I would have preferred they diplomatically explained that two Nobel Prize-winning men (Myron Scholes and Robert Merton) had decades ago developed the option pricing theory I was invoking and that, if I may use one of my favorite expressions, I was right. I let it go. I did not have a choice as that was the only expected business behavior. We had to make our way to dinner. I seriously considered going back to the hotel room to have a strong drink or a good cry, but Jeff, unflappably cool and usually able to talk me off the ledge, convinced me to swallow my pride.


pages: 923 words: 163,556

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures by Frank J. Fabozzi

algorithmic trading, Benoit Mandelbrot, Black Monday: stock market crash in 1987, capital asset pricing model, collateralized debt obligation, correlation coefficient, distributed generation, diversified portfolio, financial engineering, fixed income, global macro, index fund, junk bonds, Louis Bachelier, Myron Scholes, p-value, power law, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, short selling, stochastic volatility, subprime mortgage crisis, Thomas Bayes, transaction costs, value at risk

Louis Bachelier’s Theory of Speculation: The Origins of Modern Finance. Translated by Mark Davis and Alison Etheridge. Princeton, N.J.: Princeton university Press. Barndorff-Nielsen, Ole E. 1997. “Normal Inverse Gaussian Distributions and Stochastic Volatility Modelling.” Scandinavian Journal of Statistics 24 (1): 1-13. Black, Fischer, and Myron Scholes. 1973. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81 (3): 637-654. ———. 1987. “A Conditionally Heteroscedastic Time-Series Model for Security Prices and Rates of Return Data.” Review of Economics and Statistics 69: 542-547. Bollerslev, Tim. 2001. “Financial Econometrics: Past Developments and Future Challenges.”

The last equation results from the symmetry property of the normal distribution explained in Chapter 11 and computational rules for the logarithm. 311 Again, the last of the following equations results from the symmetry property of the normal distribution and computational rules of the logarithm. 312 This formula is named after its developers Fischer Black and Myron Scholes who were awarded the 1977 Nobel Prize in Economic Science, along with Robert Merton, for their work in option pricing theory. See Black and Scholes (1973). 313 We used the identity P(X > q) = 1 - P(X ≤ q) for any quantile q of a continuous random variable X.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Alan Greenspan, Andrei Shleifer, banking crisis, Bear Stearns, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Glass-Steagall Act, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, low interest rates, market bubble, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, savings glut, shareholder value, short selling, statistical model, subprime mortgage crisis, too big to fail, transaction costs, very high income

I thank my co-blogger, Gary Becker, for fruitful discussions of a number of the issues that I cover in the book, and Laura Bishop, Ralph Dado, Justin Ellis, Anthony Henke, and Michael Thorpe for their very helpful research assistance. I gained valuable insights from a talk by Robert Lucas and from helpful materials that he furnished me, and from a discussion with Lynn Maddox and an email exchange with Myron Scholes. Lee Lockwood and Christian Opp carefully checked the manuscript for technical economic errors and in the process made valuable suggestions for improving the book. Michael Aronson, Douglas Baird, Larry Bernstein, Michael Boudin, Nathan Christensen, Kenneth Dam, Benjamin Friedman, Rebecca Haw, Ashley Keller, William Landes, Jonathan Lewinsohn, Jennifer Nou, Charlene Posner, Eric Posner, Kenneth Posner, Raghuram Rajan, Andrew Rosenfield, Andrei Shleifer, and Luigi Zingales gave me extremely helpful comments on a previous draft.


pages: 250 words: 79,360

Escape From Model Land: How Mathematical Models Can Lead Us Astray and What We Can Do About It by Erica Thompson

Alan Greenspan, Bayesian statistics, behavioural economics, Big Tech, Black Swan, butterfly effect, carbon tax, coronavirus, correlation does not imply causation, COVID-19, data is the new oil, data science, decarbonisation, DeepMind, Donald Trump, Drosophila, Emanuel Derman, Financial Modelers Manifesto, fudge factor, germ theory of disease, global pandemic, hindcast, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, implied volatility, Intergovernmental Panel on Climate Change (IPCC), John von Neumann, junk bonds, Kim Stanley Robinson, lockdown, Long Term Capital Management, moral hazard, mouse model, Myron Scholes, Nate Silver, Neal Stephenson, negative emissions, paperclip maximiser, precautionary principle, RAND corporation, random walk, risk tolerance, selection bias, self-driving car, social distancing, Stanford marshmallow experiment, statistical model, systematic bias, tacit knowledge, tail risk, TED Talk, The Great Moderation, The Great Resignation, the scientific method, too big to fail, trolley problem, value at risk, volatility smile, Y2K

The random-walk model for prices is extended to the well-known Black–Scholes equation for option pricing: given that a certain stock has in the recent past exhibited movements with certain random properties, we can calculate a ‘fair’ price to pay for the option to buy that same stock after a period of time has elapsed. Now, one interesting question is whether the price calculated as being fair is actually the price that is paid for such a contract. Economists Fischer Black and Myron Scholes compared the theoretical predictions of their equation with the actual prices of options traded by a New York broker and found a systematic mispricing in which the sellers of options tended to get a ‘better deal’ than buyers. A result like this might lead you to think that the model’s assumptions are too general and that it simply isn’t applicable to the real-world situation.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, two and twenty, value at risk, yield curve, zero-coupon bond

In the case of earnings multiples, we recommend using ratios of enterprise value to NOPLAT rather than price to earnings or enterprise value to EBITDA. We also urge you to be careful when choosing the comparable companies. Not only should the comparable companies be in the same industry, but they should also have similar performance, as measured by ROIC and growth. Real Options In 1997, Robert Merton and Myron Scholes won the Nobel Prize in economics for developing an ingenious method to value derivatives that avoids the need to estimate either cash flows or the cost of capital.18 Their model relies on what today’s economists call a “replicating portfolio.” They argued that if a portfolio exists of traded securities whose future cash flows perfectly mimic the security you are attempting to value, the portfolio and security must have the same price.

See Return on invested capital (ROIC) Roll-up strategies, 611–612 RONIC (return on new invested capital), 262–263, 268–269 Russian government default crisis, 11 S Sale-leaseback transactions, 41–42 Sales productivity, 583 Savings and loan crisis, 11 Scalability of products/processes, 104 Scenario analysis, 339, 344–348 Scenario DCF approach, 711–716, 729–730, 785–786 Scenario development, 743–744 Scenarios, creating, 533–534 Scenario weighting, 742–743 Schiller, Robert, 65 Scholes, Myron, 165 Securitized receivables, 327–328, 440 Sell-side analysts, 689 Sensitivity analysis, 339, 342–344 Shareholder capitalism, 6–10 Shareholder payouts, 663–668 Shareholder returns. See Total returns to shareholders (TRS) The Shareholder Value Myth (Stout), 7 Share repurchases, 38–39, 197, 649, 664–668 Short-termism, 11–14 Siemens, 629, 640 Simplified intermediate forecast, 230 Single-path DCF, 785 Social responsibility, 6, 9–10 Sodexo, 215–216 Solvency, 847–849 Spin-offs, 641, 642–643 Split-offs, 643 Stakeholder interests, 6–10 Stochastic simulation DCF, 786 Stock market: bubbles, 68–69 (see also Financial crises) cross-listings, 86–88 diversification, 83–84 earnings (see Earnings per share (EPS)) fundamentals of, 66–74 growth vs. value stocks, 68 index membership impact on company, 85–86 informed investors vs. noise investors, 66–68 market mechanics, 85 relationship of company size to value, 84–85 stock splits, 88–90 total returns to shareholders (see Total returns to shareholders (TRS)) understanding expectations, 61–62 Stock splits, 88–90 Stout, Lynn, 7 Stranded costs, 638–639 Strategic vision, 625 Subsidiaries, 150–151, 181–182 T Taiwan Semiconductor, 24 Target-setting, 589–592, 651–652 Target weights, 308–312 Taxes, 397–410 deferred, 184–186, 404–410 forecasting, 242–243 operating, 398–407 (see also Operating taxes) provisions and, 429 Tax loss carryforwards, 182, 324 Tax-loss carryforwards, 405 Tax on a maturity mismatch (TMM), 771 Tax penalty on equity, 769–770 Tax shields, valuing, 159–160 Technology bubble, 10–11, 72–73, 297–298, 302 Top-down forecasting, 235–237 Total debt, 244 Total funds invested, computing, 180–182 870 INDEX Total returns to shareholders (TRS), 5, 69–70 correlation with employment growth, 8–9 decomposing, 54–61 diversification and, 567–568 enhanced approach to analyzing, 58–59 impact of debt financing on, 59 key drivers of, 57 managerial implications, 62–63 as measure of management performance, 49–50 and spin-offs, 643 traditional approach to analyzing, 54–57 traditional vs. enhanced decomposition, 58 Tracking stock, 641, 645 TradeCo, 465–467 Traders, 686–687 Trade sales, 641 Transformational mergers, 612–613 Transparency, 594–595, 689–690, 692–693 Triangulation, 736–738 TRS.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

airline deregulation, airport security, Alan Greenspan, Alvin Toffler, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, bond market vigilante , book value, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, classic study, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Dr. Strangelove, energy security, equity premium, fiat currency, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, Future Shock, Glass-Steagall Act, Greenspan put, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", junk bonds, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Lewis Mumford, Long Term Capital Management, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, Neil Armstrong, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Phillips curve, plutocrats, popular capitalism, price stability, RAND corporation, Reminiscences of a Stock Operator, rent-seeking, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, stock buybacks, subprime mortgage crisis, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tipper Gore, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, We are all Keynesians now, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

With the benefit of hindsight, the Fed’s refusal to be emotionally exercised by the disruptive proliferation of unregulated swaps was a failure of the Greenspan era. • • • If there was one institution that embodied Greenspan’s optimism about the new finance, it was Long-Term Capital Management. Founded four years earlier by quantitative wizards from Salomon Brothers, Long-Term’s partners included the financial economists Myron Scholes and Robert Merton, who had received the Nobel Prize for their “new method to determine the value of derivatives.” David Mullins, the former Fed vice chairman who had lectured Mike Prell about the efficiency of markets, was another principal at LTCM; and for its first two and a half years, the firm performed spectacularly.

., 466–69, 619–20 Sarbanes, Paul, 440 Saturday Night Special, 232–36, 261, 264, 332 Saudi Arabia, 186–90, 391–92, 394, 397 Saulnier, Raymond, 138–39 savings, 136–37, 149, 212, 421, 427, 431, 435, 534, 593 of consumers, 32, 46 global, 641–42, 655, 670 “glut” in, 641–42, 655, 670 protection of, 123, 148 ways to hold it, 49, 87–88 See also money-market funds savings and loan associations (S&Ls), 47–48, 79–80, 129–30, 148–50, 179, 218, 264, 294–96, 360, 379–82, 384–85, 389–90, 394, 405–6, 429, 441, 448, 501 Schlesinger, Arthur Jr., 64, 192 Schmidt, Helmut, 196–200 Schoenholtz, Kim, 643 Scholes, Myron, 536 Schumer, Charles, 342, 567 Schwartz, Anna, 88, 655 Scotland, 645 Scottsdale, Arizona, 562 Scowcroft, Brent, 179, 398 Sears, Roebuck, 320 Secret Service, 118, 120, 194, 245, 262, 591–92, 650 secular stagnation, 32–33, 72, 593–95, 606, 610 securities, 9, 198, 443, 522, 616 and 1987 crash, 356, 360 and banks, 403, 525, 559 and the Fed, 313–14 Greenspan on, 312, 321, 403 mortgage-backed, 8, 601–2, 618–20, 630 new types of, 466 trading in, 311–14, 321, 345 See also Glass-Steagall Act; mortgages: securities Securities and Exchange Commission (SEC), 296, 346, 449, 485, 533, 535, 545, 560, 599–600, 602, 657, 662–63 Seidman, Ellen, 534 September 11, 2001, 583–99 Sequoia smear campaign, 140–44 Serra, Jaime, 472 service businesses, 493–95, 503–4 Shah of Iran, 185–86, 189–91, 193–94 Shaw, Edward, 48–49, 213, 414, 593 Sheiner, Bill, 21–22 Shelby, Richard, 627–28, 630 Shiller, Robert, 502, 505 Shopkorn, Stanley, 358, 677 Shrum, Bob, 511 Shulman, David, 501, 546 Shultz, George, 2, 225–26 Siegman, Charles, 516–17 silo busting, 148, 523, 525–26, 544, 559 Silva Herzog Flores, Jesús, 282–83 Simon, William, 170–72, 175, 177, 193–94, 197 Sirhan, Sirhan, 118 Sixteenth Amendment, 159 Skinner, Richard Dana, 43–44, 47 Slate magazine, 655 Slifman, Larry, 492–93 Sloan, Alfred P., 60 Smelcer, Wilma, 351–52, 363 Smith, Adam, 147, 161, 645 Smith, Jim, 130 Social Security reform commission, 272–82, 287–88, 309–10, 319, 368, 471, 567, 572, 676 Social Security system, 272, 420, 567 socialism, 29 Solow, Robert, 77, 427 South Korea, 514–22, 537, 539, 541, 547 Soviet Union, 77, 109, 182, 191, 530.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Abraham Wald, Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, lateral thinking, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk free rate, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

His third claim to fame is that he was the first to use the ‘correct’ formulæ for pricing options, formulæ that were rediscovered and originally published several years later by the next three people on our list. Thorp used these formulæ to make a fortune for himself and his clients in the first ever quantitative finance-based hedge fund. See Thorp (2002) for the story behind the discovery of the Black-Scholes formulæ. 1973 Black, Scholes and Merton Fischer Black, Myron Scholes and Robert Merton derived the Black-Scholes equation for options in the early seventies, publishing it in two separate papers in 1973 (Black & Scholes, 1973, and Merton, 1973). The date corresponded almost exactly with the trading of call options on the Chicago Board Options Exchange. Scholes and Merton won the Nobel Prize for Economics in 1997.


pages: 302 words: 86,614

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bear Stearns, Bernie Madoff, book value, Bretton Woods, business process, call centre, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, financial engineering, fixed income, global macro, high net worth, high-speed rail, impact investing, interest rate derivative, Isaac Newton, Jim Simons, junk bonds, Long Term Capital Management, managed futures, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Michael Milken, Myron Scholes, NetJets, oil shock, pattern recognition, Pershing Square Capital Management, Ponzi scheme, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Savings and loan crisis, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, stock buybacks, systematic bias, systematic trading, tail risk, two and twenty, zero-sum game

A special thank you to Mohamed El-Erian, PIMCO CEO and co-CIO, for being a superior mentor to me during the tedious writing process, and for such a well-thought-out and researched foreword to this book. To all the individuals who read my entire manuscript and provided very useful feedback, perspective, and comments, like Julian Robertson, Bill Ackman, Roxanne Donovan, Roy Katzovicz, Nouriel Roubini, Myron Scholes, Jeff Kaplan, Rick Sopher, Josh Friedlander, Mary Beth Grover, Jonathan Gasthalter, Parag Shah, Alexei Nabarro, Ryan Fusaro, Jim McCaughan, Jim Spellman, Mike Spence, Mario Gabelli, Leon Cooperman, and Meredith Whitney—I understand how valuable your time is; your support is priceless. A special thank you to CNBC president and CEO Mark Hoffman and senior vice president and editor-in-chief of Business News, Nik Deogun, for supporting me in writing this book.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, Washington Consensus, wealth creators, working poor, yield curve

.† Black-Scholes The name of the formula that made it possible to create prices in the derivatives markets; before the equation was discovered (or invented, depending on your view of what mathematics does), uncertainties about how probabilities changed made it impossible to create accurate prices for an option over time. Black-Scholes gave a way of mathematically modeling the price of the options, and led to a huge boom in the global market for derivatives. The equation is named after the two men who created it, Fischer Black and Myron Scholes. Black Swan A term coined by the philospher-investor Naseem Nicholas Taleb for an event so rare it doesn’t fit in normal models of statistical probability. As a result, institutions such as banks are grievously unprepared for this kind of very rare event. It is possible that humans are hardwired not to have a good intuitive understanding of these kinds of risks.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"World Economic Forum" Davos, Adam Curtis, air traffic controllers' union, Alan Greenspan, AOL-Time Warner, banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, job polarisation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, Larry Ellison, light touch regulation, Londongrad, Long Term Capital Management, low interest rates, low skilled workers, manufacturing employment, market bubble, Martin Wolf, Mary Meeker, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, proprietary trading, Right to Buy, rising living standards, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

According to their architects, by anticipating and controlling the level of risk, finance could increase the level of liquidity in the markets and improve the level of efficiency with which resources were allocated, thus enabling a higher level of national and world economic activity. This claim seemed to be vindicated when two hedge fund partners, Myron Scholes and Robert Merton, won the Nobel Prize for economics in 1997. Their Greenwichbased firm, Long Term Capital Management had been founded by John Meriwether, a former highly successful bond trader at Salomon, Lewis’s boss and widely believed to be the inspiration for the Bonfire of the Vanities , Tom Wolf’s 1980s novel of Wall Street excess.


pages: 315 words: 93,628

Is God a Mathematician? by Mario Livio

Albert Einstein, Alvin Toffler, Antoine Gombaud: Chevalier de Méré, Brownian motion, cellular automata, correlation coefficient, correlation does not imply causation, cosmological constant, Dava Sobel, double helix, Edmond Halley, Eratosthenes, Future Shock, Georg Cantor, Gerolamo Cardano, Gregor Mendel, Gödel, Escher, Bach, Henri Poincaré, Isaac Newton, Johannes Kepler, John von Neumann, music of the spheres, Myron Scholes, Plato's cave, probability theory / Blaise Pascal / Pierre de Fermat, Russell's paradox, seminal paper, Thales of Miletus, The Design of Experiments, the scientific method, traveling salesman

As this book will show, much, and perhaps all, of the human enterprise also seems to emerge from an underlying mathematical facility, even where least expected. Examine, for instance, an example from the world of finance—the Black-Scholes option pricing formula (1973). The Black-Scholes model won its originators (Myron Scholes and Robert Carhart Merton; Fischer Black passed away before the prize was awarded) the Nobel Memorial Prize in economics. The key equation in the model enables the understanding of stock option pricing (options are financial instruments that allow bidders to buy or sell stocks at a future point in time, at agreed-upon prices).


pages: 1,082 words: 87,792

Python for Algorithmic Trading: From Idea to Cloud Deployment by Yves Hilpisch

algorithmic trading, Amazon Web Services, automated trading system, backtesting, barriers to entry, bitcoin, Brownian motion, cloud computing, coronavirus, cryptocurrency, data science, deep learning, Edward Thorp, fiat currency, global macro, Gordon Gekko, Guido van Rossum, implied volatility, information retrieval, margin call, market microstructure, Myron Scholes, natural language processing, paper trading, passive investing, popular electronics, prediction markets, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Rubik’s Cube, seminal paper, Sharpe ratio, short selling, sorting algorithm, systematic trading, transaction costs, value at risk

It cannot replace a thorough introduction to Python itself nor to trading in general. However, it systematically combines these two fascinating worlds to provide a valuable source for the generation of alpha in today’s competitive financial and cryptocurrency markets. References and Further Resources Books and papers cited in this chapter: Black, Fischer, and Myron Scholes. 1973. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81 (3): 638-659. Chan, Ernest. 2013. Algorithmic Trading: Winning Strategies and Their Rationale. Hoboken et al: John Wiley & Sons. Dorn, Anne, Daniel Dorn, and Paul Sengmueller. 2008. “Why Do People Trade?”


pages: 1,544 words: 391,691

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

By multiplying the number of periods or dividing each period into sub-periods, we can obtain a very large number of very small sub-periods until we have a very large number of values for the stock at the option’s maturity date, which is more realistic than the simplified schema that we developed above. Here is what it looks like graphically: 2. The Black–Scholes model In a now famous article, Fisher Black and Myron Scholes (1972) presented a model for pricing European-style options that is now very widely used. It is based on the construction of a portfolio composed of the underlying asset and a certain number of options such that the portfolio is insensitive to fluctuations in the price of the underlying asset.

rules of thumb safety stocks sale and leaseback sale of shares sale to trade buyer sales contraction impact sales days, working capital sales of financial securities sales growth margin analysis working capital and sales levels, recession sales multiple sales percentage, breakeven point sales trends, operating profit sales valuation, companies salesman role salvage value (residual value) sample-building, comparable companies scenario analysis schedule of future cash flows Scholes, Myron scissors effect scope of consolidation scoring techniques scrip dividend seasonal business activity second lien debt “secondary” LBOs secondary market bonds cash investment financial securities function of with investment products investment products without sector concept securities see financial securities securitisation securitisation vehicles security, cash investment security market line segmentation of markets self-hedging self-mimicry sell options see put options sellers leveraged buyout options share considerations selling price maximisation semi-strong efficient market senior debt seniority of repayments sensitivity analysis maturity of bonds stock’s sector SEPA see Single Euro Payment Area separation theorem service-dominated economy service rate inventories stockout avoidance services and advice setting up companies setting up payments settlement date, bonds shadow rating share buy-backs see also buy-backs share exchange absorption of company acquisitions share issue accounting criteria borrowing capacity definition dividends finance theory goodwill liquidity and reserved as signal share prices bonds liquidity listed companies random walk returns rights issue share purchase, hostile bids share purchase agreement (SPA) share warrants see warrants shareholder base see also shareholder structure shareholder equity acquisitions balance sheet book profitability capital employed company finance consolidated accounts earnings and financial cycle increasing ratio to net income roles of solvency valuation methods shareholder-managers shareholder position, underlying asset shareholder return cash cost of capital creditor comparison shares see also total shareholder return shareholder structure see also shareholder base shareholder wealth, equilibrium markets shareholders all-share transactions capital structure cash provision changes convertible bonds creditor conflict as defence measure demergers/split-offs dividend demands financing companies internal financing listed companies operating assets options power at general meetings preferences real-estate financing risk accruing to sale of shares share issue share proceeds strategies types value and voting caps warrants shareholders’ agreement shares acquisitions all-share deals allocation of basic concepts block trades bonds exchangeable with cancellation of classes of contribution of delta dividend paid in double voting rights IPO size limited companies listing techniques offerings one share one voting right paying in payment amounts preference repurchase of stake-building treasury see also hybrid financial securities Shaw, Edward Shleifer, A.


pages: 976 words: 235,576

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, algorithmic management, Amazon Robotics, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, compensation consultant, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial engineering, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, fulfillment center, full employment, future of work, gender pay gap, gentrification, George Akerlof, Gini coefficient, glass ceiling, Glass-Steagall Act, Greenspan put, helicopter parent, Herbert Marcuse, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kevin Roose, Kiva Systems, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, Larry Ellison, longitudinal study, low interest rates, low skilled workers, machine readable, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, meritocracy, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, opioid epidemic / opioid crisis, Paul Samuelson, payday loans, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Solow, Ronald Reagan, Rutger Bregman, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Stephen Fry, Steve Jobs, stock buybacks, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Theory of the Leisure Class by Thorstein Veblen, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, warehouse robotics, Winter of Discontent, women in the workforce, work culture , working poor, Yochai Benkler, young professional, zero-sum game

to value such securities: The 1950s and 1960s witnessed fundamental theoretical advances in the construction and pricing of financial instruments—including the capital asset pricing model that grew out of Harry Markowitz’s work on portfolio allocation and the Black-Scholes model for pricing options and other derivatives. See Mark Rubenstein, A History of the Theory of Investments (Hoboken, NJ: John Wiley & Sons, 2006), 167–75; Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (May–June 1973): 637–54. to trade complex varieties at scale: The innovations in computing and information technology that make it possible to collect, store, analyze, and quickly communicate the vast quantities of data on which securitization depends are well known.

and then move on: Derman, My Life as a Quant, 123. “skilled mathematicians, modelers”: Derman, My Life as a Quant, 5. by implementing them: See William F. Sharpe, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,” Journal of Finance 19, no. 3 (September 1964): 425–42, and Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (1973): 637–54. measure and manipulate the odds in their wagers: F. N. David, Games, Gods and Gambling (Mineola, NY: Dover, 1998). the services they made possible: See generally Dan Awrey, “Toward a Supply-Side Theory of Financial Innovation,” Journal of Comparative Economics 41, no. 2 (2013): 401, and Donald MacKenzie, “Is Economics Performative?


Risk Management in Trading by Davis Edwards

Abraham Maslow, asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, financial engineering, fixed income, Glass-Steagall Act, global macro, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, junk bonds, London Whale, Long Term Capital Management, low interest rates, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

Long Term Capital Management Long Term Capital Management (LTCM) went bankrupt in 1998 following a panic in Asian and Russian bonds. The hedge fund was the darling of Wall Street in the 1990s after being founded by the former vice‐chairman of Solomon Brothers, John Meriwether, and included Nobel Prize winners Myron Scholes and Robert Merton on its board of directors. LTCM was the dominant holder in several varieties of Russian bonds. Many of these bonds had identical payoffs differentiated by different rules on trading prior to expiration. If held to maturity, these bonds would have provided a guaranteed profit.


pages: 111 words: 1

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Alan Greenspan, Antoine Gombaud: Chevalier de Méré, availability heuristic, backtesting, behavioural economics, Benoit Mandelbrot, Black Swan, commoditize, complexity theory, corporate governance, corporate raider, currency peg, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, endowment effect, equity premium, financial engineering, fixed income, global village, hedonic treadmill, hindsight bias, junk bonds, Kenneth Arrow, Linda problem, Long Term Capital Management, loss aversion, mandelbrot fractal, Mark Spitznagel, Market Wizards by Jack D. Schwager, mental accounting, meta-analysis, Michael Milken, Myron Scholes, PalmPilot, Paradox of Choice, Paul Samuelson, power law, proprietary trading, public intellectual, quantitative trading / quantitative finance, QWERTY keyboard, random walk, Richard Feynman, risk free rate, road to serfdom, Robert Shiller, selection bias, shareholder value, Sharpe ratio, Steven Pinker, stochastic process, survivorship bias, too big to fail, Tragedy of the Commons, Turing test, Yogi Berra

Markowitz’s theory was the near collapse of the financial system in the summer of 1998 (as we saw in Chapters 1 and 5) by Long Term Capital Management (“LTCM”), a Greenwich, Connecticut, fund that had for principals two of Dr. Markowitz’s colleagues,“Nobels”as well. They are Drs. Robert Merton (the one in Chapter 3 trouncing Shiller) and Myron Scholes. Somehow they thought they could scientifically “measure” their risks. They made absolutely no allowance in the LTCM episode for the possibility of their not understanding markets and their methods being wrong. That was not a hypothesis to be considered. I happen to specialize in black swans. Suddenly I started getting some irritating fawning respect.


pages: 313 words: 101,403

My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman

Bear Stearns, Berlin Wall, bioinformatics, Black-Scholes formula, book value, Brownian motion, buy and hold, capital asset pricing model, Claude Shannon: information theory, Dennis Ritchie, Donald Knuth, Emanuel Derman, financial engineering, fixed income, Gödel, Escher, Bach, haute couture, hiring and firing, implied volatility, interest rate derivative, Jeff Bezos, John Meriwether, John von Neumann, Ken Thompson, law of one price, linked data, Long Term Capital Management, moral hazard, Murray Gell-Mann, Myron Scholes, PalmPilot, Paul Samuelson, pre–internet, proprietary trading, publish or perish, quantitative trading / quantitative finance, Sharpe ratio, statistical arbitrage, statistical model, Stephen Hawking, Steve Jobs, stochastic volatility, technology bubble, the new new thing, transaction costs, volatility smile, Y2K, yield curve, zero-coupon bond, zero-sum game

Until the early 1970s, no one knew how to estimate the value of options in a convincing way. A call option that paid off when the stock price rose seemed much like a bet on a horse: The more optimistic you were about the stock's future prospects, the more you should be willing to pay for it. Each person set his own fair price. Then, in 1973, Fischer Black and Myron Scholes published their eponymous Black-Scholes equation for the value of an option. That same year, Robert Merton provided a more rigorous and insightful way of understanding the argument behind their equation. Eventually, his formalism came to supplant theirs, and became the standard. Merton and Scholes won the 1997 Nobel Prize in Economics for their work, but Fischer, who was certainly their equal, died in 1995.


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, Blue Bottle Coffee, carried interest, cloud computing, compensation consultant, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, Glass-Steagall Act, high net worth, index fund, information asymmetry, initial coin offering, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, power law, price stability, prudent man rule, ride hailing / ride sharing, rolodex, Salesforce, Sand Hill Road, seminal paper, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, the long tail, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

Here’s a quick example: If our hypothetical company raises a Series C financing at five dollars per share, the OPM says that all we know for certain is that anyone who holds Series C shares should value them at five dollars—simple enough. But if you own a Series B or a Series A share, the OPM says those are worth some fraction of five dollars—why? Well, to really answer that question you’d need to have a Nobel Prize in economics (as does Myron Scholes, the co-inventor of Black-Scholes), but the not-too-mathematical answer the OPM generates is that those Series A or B shares could be worth many different values based on a series of probabilistic outcomes if/when the company ultimately gets sold or goes public. So the OPM will assign a value to the Series A and B that is a substantial discount to the price of five dollars per share that is assigned to the Series C.


pages: 364 words: 99,613

Servant Economy: Where America's Elite Is Sending the Middle Class by Jeff Faux

air traffic controllers' union, Alan Greenspan, back-to-the-land, Bear Stearns, benefit corporation, Bernie Sanders, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, call centre, centre right, classic study, cognitive dissonance, collateralized debt obligation, collective bargaining, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, David Brooks, David Ricardo: comparative advantage, disruptive innovation, falling living standards, financial deregulation, financial innovation, full employment, Glass-Steagall Act, guns versus butter model, high-speed rail, hiring and firing, Howard Zinn, Hyman Minsky, illegal immigration, indoor plumbing, informal economy, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kevin Roose, Kickstarter, lake wobegon effect, Long Term Capital Management, low interest rates, market fundamentalism, Martin Wolf, McMansion, medical malpractice, Michael Milken, military-industrial complex, Minsky moment, mortgage debt, Myron Scholes, Naomi Klein, new economy, oil shock, old-boy network, open immigration, Paul Samuelson, plutocrats, price mechanism, price stability, private military company, public intellectual, radical decentralization, Ralph Nader, reserve currency, rising living standards, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, school vouchers, Silicon Valley, single-payer health, Solyndra, South China Sea, statistical model, Steve Jobs, Suez crisis 1956, Thomas L Friedman, Thorstein Veblen, too big to fail, trade route, Triangle Shirtwaist Factory, union organizing, upwardly mobile, urban renewal, War on Poverty, We are the 99%, working poor, Yogi Berra, Yom Kippur War, you are the product

Editorial, “Don’t Blame the New Deal,” New York Times, September 28, 2008. 15. Phil Angelides, “Fannie, Freddie and the Financial Crisis,”Bloomberg View, August 3, 2011, http://www.bloomberg.com/news/2011-08-04/fannie-freddie-role-in-the-financial-crisis-commentary-by-phil-angelides.html. 16. The critical work was done by Fischer Black, Myron Scholes, and, later, Robert Merton. Scholes and Merton shared the Nobel Prize in Economics for 1997. 17. Gretchen Morgenson, “Was There a Loan It Didn’t Like?,” New York Times, November 11, 2008. 18. Michael Lewis, “The End,” Portfolio.com, November 11, 2008, http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom. 19.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

Alan Greenspan, AltaVista, Andrei Shleifer, Apollo 13, asset allocation, behavioural economics, Cass Sunstein, classic study, congestion pricing, coronavirus, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Great Leap Forward, Gregor Mendel, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, John Bogle, John Meriwether, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, Monkeys Reject Unequal Pay, moral hazard, Myron Scholes, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Ronald Coase, Ronald Reagan, seminal paper, shareholder value, short selling, Silicon Valley, South Sea Bubble, tacit knowledge, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, vertical integration, world market for maybe five computers, Yogi Berra, zero-sum game

The experts worked for Long-Term Capital Management (LTCM), a hedge fund that was started in 1994 by John Meriwether, a former bond trader whose trading skills had made him a legend on Wall Street. From the outside, LTCM looked a little like the Manhattan Project of investing. Meriwether had hired a host of Wall Street whiz kids who were experts in using computer models to figure out how to make money. And he’d brought on board some of the founding fathers of modern finance. Myron Scholes and Robert Merton had invented the model that investors everywhere use to figure out how much options are worth, and now they were working for LTCM. It was hard to see how such a dream team could go wrong. Even though investors had to put up a minimum of $10 million to get into the fund, and 25 percent of each year’s profits went to the fund’s managers, people still clamored to get in, especially after LTCM turned in impressive returns four years in a row.


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial engineering, financial intermediation, fixed income, global macro, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, Jim Simons, law of one price, Long Term Capital Management, Louis Bachelier, machine readable, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, Performance of Mutual Funds in the Period, pneumatic tube, profit motive, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, tail risk, trade route, transaction costs, value at risk, yield curve, zero-sum game

“An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse.” Journal of Finance 50, 1655– 1689. Black, Fisher, 1972. “Capital Market Equilibrium with Restricted Borrowing.” Journal of Business 45, 444–455. Black, F. and R. Jones, 1987. “Simplifying Portfolio Insurance.” Journal of Portfolio Management 14, 48–51. Black, Fischer and Myron Scholes (1973). “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81, 637–654. Bloomfield, R., M. O’Hara and G. Saar, 2005. “The ‘Make or Take’ Decision in an Electronic Market: Evidence on the Evolution of Liquidity.” Journal of Financial Economics 75, 165–199. Board, J. and C.


file:///C:/Documents%20and%... by vpavan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, AOL-Time Warner, asset allocation, Bear Stearns, Berlin Wall, book value, business cycle, buttonwood tree, buy and hold, Carl Icahn, corporate governance, corporate raider, currency risk, disintermediation, diversification, diversified portfolio, Donald Trump, estate planning, financial engineering, fixed income, index fund, intangible asset, interest rate swap, John Bogle, junk bonds, Larry Ellison, margin call, Mary Meeker, money market fund, Myron Scholes, new economy, payment for order flow, price discovery process, profit motive, risk tolerance, shareholder value, short selling, Silicon Valley, Small Order Execution System, Steve Jobs, stocks for the long run, stocks for the long term, tech worker, technology bubble, transaction costs, Vanguard fund, women in the workforce, zero-coupon bond, éminence grise

Accounting is often imprecise, especially when it comes to estimating the future value of a corporate jet, or the losses a bank will suffer on its loans. In both cases, companies and their accountants have figured out ways to make reliable estimates. Most companies today use the Black-Scholes model, developed by economists Fischer Black and Myron Scholes, who won a Nobel Prize in economics for his work on the model, to explain to employees what their stock options are worth. Once they run that calculation, which considers such variables as the stock price when granted, the exercise price, the options' expected life, stock price fluctuations, and interest rates over the life of the option, companies can easily figure the long-term cost of options to shareholders.


pages: 363 words: 109,834

The Crux by Richard Rumelt

activist fund / activist shareholder / activist investor, air gap, Airbnb, AltaVista, AOL-Time Warner, Bayesian statistics, behavioural economics, biodiversity loss, Blue Ocean Strategy, Boeing 737 MAX, Boeing 747, Charles Lindbergh, Clayton Christensen, cloud computing, cognitive bias, commoditize, coronavirus, corporate raider, COVID-19, creative destruction, crossover SUV, Crossrail, deep learning, Deng Xiaoping, diversified portfolio, double entry bookkeeping, drop ship, Elon Musk, en.wikipedia.org, financial engineering, Ford Model T, Herman Kahn, income inequality, index card, Internet of things, Jeff Bezos, Just-in-time delivery, Larry Ellison, linear programming, lockdown, low cost airline, low earth orbit, Lyft, Marc Benioff, Mark Zuckerberg, Masayoshi Son, meta-analysis, Myron Scholes, natural language processing, Neil Armstrong, Network effects, packet switching, PageRank, performance metric, precision agriculture, RAND corporation, ride hailing / ride sharing, Salesforce, San Francisco homelessness, search costs, selection bias, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, Snapchat, social distancing, SoftBank, software as a service, statistical model, Steve Ballmer, Steve Jobs, stochastic process, Teledyne, telemarketer, TSMC, uber lyft, undersea cable, union organizing, vertical integration, WeWork

Norton, “Focus Your Organization on Strategy—with the Balanced Scorecard,” Harvard Business Review (2005): 1–74. CHAPTER 16. DON’T CONFUSE CURRENT FINANCIAL RESULTS WITH STRATEGY 1. Justin Fox and Rajiv Rao, “Learn to Play the Earnings Game,” Fortune, March 31, 1997. 2. Jerry Useem, “The Long-Forgotten Flight That Sent Boeing Off Course,” Atlantic, November 20, 1999. 3. Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (1973): 637–654. Fischer Black died in 1995 at only fifty-seven. Had he lived, he would have received the Nobel Prize in 1997 along with Merton and Scholes. 4. Warren E. Buffett and Jamie Dimon, “Short-Termism Is Harming the Economy,” Wall Street Journal, June 7, 2018. 5.


pages: 367 words: 110,161

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs

Alan Greenspan, asset allocation, asset-backed security, bank run, Bear Stearns, beat the dealer, break the buck, buy and hold, Carl Icahn, collateralized debt obligation, commodity trading advisor, coronavirus, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, diversification, diversified portfolio, Edward Thorp, financial innovation, fixed income, global macro, high net worth, hiring and firing, housing crisis, Hyman Minsky, index card, index fund, interest rate swap, junk bonds, Kevin Roose, low interest rates, Marc Andreessen, Minsky moment, money market fund, mortgage debt, Myron Scholes, NetJets, Northern Rock, off-the-grid, pneumatic tube, Ponzi scheme, price mechanism, quantitative easing, Robert Shiller, Savings and loan crisis, skunkworks, sovereign wealth fund, stem cell, Steve Jobs, stocks for the long run, The Great Moderation, too big to fail, Vanguard fund, yield curve

It also got it past $1 billion, a key threshold for many institutional investors. He was paving the way. Putting in his own money meant he had to pay fees on it to Janus. In his haste to get hired, he hadn’t really bothered negotiating a salary. It just wasn’t top of mind. Former Pimco board member Myron Scholes, a Nobel Prize–winning economist, had joined Janus in July as chief investment strategist, so Gross told Weil just to give him whatever Scholes got, which turned out to be not that much. There were about two hundred Janus employees who made more. Taking into account the fees he paid on his $700-plus million, Gross was effectively paying Janus for the privilege of working there.


Trading Risk: Enhanced Profitability Through Risk Control by Kenneth L. Grant

backtesting, business cycle, buy and hold, commodity trading advisor, correlation coefficient, correlation does not imply causation, delta neutral, diversification, diversified portfolio, financial engineering, fixed income, frictionless, frictionless market, George Santayana, global macro, implied volatility, interest rate swap, invisible hand, Isaac Newton, John Meriwether, Long Term Capital Management, managed futures, market design, Myron Scholes, performance metric, price mechanism, price stability, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two-sided market, uptick rule, value at risk, volatility arbitrage, yield curve, zero-coupon bond

Its leader John Meriwether, is responsible for dramatic advancements in the field of relative value fixed income trading—a strategy that many (including this reporter) believe to be both viable and vital to this day. My own personal case of blind devotion, deriving largely from my status as a wanna-be academic, was and still is skewed towards Robert Merton and Myron Scholes, whose contributions to the world of modern financial engineering speak for themselves, and need no particular embellishment from yours truly. Like Newton, their accomplishments will survive them, in my view for as long as the world continues to devote resources to the challenge of efficient asset valuation.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

Back then, in the 1970s, access to a machine like the PDP-1, with graphics, sound, plotting, and a supportive hacker 3 culture, was a rare opportunity. It was also the first of the series of accidents that eventually led me into quantitative finance. I wish I could say that I realized the PDP-1 would allow me to use the insights of Fischer Black, Myron Scholes, and Robert Merton to become a god of the options market and buy Chicago, but those were the guys at O’Connor & Associates and Chicago Research and Trading, not me. I used the machine to simulate nuclear physics experiments for the lab that adopted me as a sophomore. They flew me down to use the particle Intr oduction xix accelerators at Brookhaven National Laboratory to find out the meaning of life, the universe, and everything by smashing one atomic nucleus into another—sort of a demolition derby with protons.


pages: 358 words: 119,272

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Alan Greenspan, Albert Einstein, asset allocation, banking crisis, Bear Stearns, behavioural economics, book value, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, fake news, financial engineering, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, global macro, hindsight bias, Kickstarter, Long Term Capital Management, low interest rates, market bubble, Michael Milken, military-industrial complex, Money creation, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, price stability, reserve currency, risk free rate, Robert Gordon, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

[5] The Nobel Committee believed Kahneman had elucidated some of the errors in human judgement that eradicate the surety of efficiency. Ironically, Kahneman’s first published article on the concept appeared in 1974, just as Wall Street was coming to embrace market efficiency. The Nobel Committee had previously honoured the acolytes of efficiency - Harry Markowitz, Merton Miller and William Sharpe in 1990, and Myron Scholes and Robert Merton in 1997. It now recognises a psychologist who questions whether human judgement, even in aggregate, lends itself to efficiency. If there is a legitimate role for the study of human judgement and decision-making under uncertainty, then financial history is redeemed. What is financial history if not such a study?


pages: 472 words: 117,093

Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

"World Economic Forum" Davos, 3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, algorithmic bias, AlphaGo, Amazon Mechanical Turk, Amazon Web Services, Andy Rubin, AOL-Time Warner, artificial general intelligence, asset light, augmented reality, autism spectrum disorder, autonomous vehicles, backpropagation, backtesting, barriers to entry, behavioural economics, bitcoin, blockchain, blood diamond, British Empire, business cycle, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, CRISPR, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, Dean Kamen, deep learning, DeepMind, Demis Hassabis, discovery of DNA, disintermediation, disruptive innovation, distributed ledger, double helix, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ethereum, ethereum blockchain, everywhere but in the productivity statistics, Evgeny Morozov, fake news, family office, fiat currency, financial innovation, general purpose technology, Geoffrey Hinton, George Akerlof, global supply chain, Great Leap Forward, Gregor Mendel, Hernando de Soto, hive mind, independent contractor, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, Jim Simons, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, Kiva Systems, law of one price, longitudinal study, low interest rates, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Marc Benioff, Mark Zuckerberg, meta-analysis, Mitch Kapor, moral hazard, multi-sided market, Mustafa Suleyman, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Project Xanadu, radical decentralization, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Robert Solow, Ronald Coase, Salesforce, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, synthetic biology, tacit knowledge, TaskRabbit, Ted Nelson, TED Talk, the Cathedral and the Bazaar, The Market for Lemons, The Nature of the Firm, the strength of weak ties, Thomas Davenport, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, Two Sigma, two-sided market, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, ubercab, Vitalik Buterin, warehouse robotics, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

# A Series A investment is typically the first round of formal investment in a startup. Usually the amount involved is much closer to $1 million than $300 million. ** Avinash Dixit and Robert Pindyck worked out much of the economics of real-options pricing, building on earlier work by Bob Merton, Myron Scholes, and Fischer Black, among others. See, for example, Avinash K. Dixit and Robert S. Pindyck, Investment under Uncertainty (Princeton, NJ: Princeton University Press, 1994). CHAPTER 9 DO PRODUCTS HAVE A PRAYER? The wise learn many things from their enemies. — Aristophanes, 414 BCE UBER’S URBAN TRANSPORTATION PLATFORM WAS BORN IN Paris in 2008 when Travis Kalanick and Garrett Camp had difficulty hailing a cab.


Stock Market Wizards: Interviews With America's Top Stock Traders by Jack D. Schwager

Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Black-Scholes formula, book value, commodity trading advisor, computer vision, East Village, Edward Thorp, financial engineering, financial independence, fixed income, implied volatility, index fund, Jeff Bezos, John Meriwether, John von Neumann, junk bonds, locking in a profit, Long Term Capital Management, managed futures, margin call, Market Wizards by Jack D. Schwager, money market fund, Myron Scholes, paper trading, passive investing, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk-adjusted returns, short selling, short squeeze, Silicon Valley, statistical arbitrage, Teledyne, the scientific method, transaction costs, Y2K

While our losses were much smaller, in both percentage and absolute dollar terms, than those suffered by, for example, Long Term Capital Management, they were significant enough that we're no longer engaged in this sort of trading at all. LTCM—a hedge fund headed by renowned former-Salomon bond trader John Meriwether and whose principals included economics Nobel laureates Robert Merton and Myron Scholes—was on the brink of extinction during the second half of 1998. After registering an average annual gain of 34 percent in its first three years and expanding its assets under management to near $5 billion, LTCM lost a staggering 44 percent (roughly $2 billion) in August 1998 alone. These losses were due to a variety of factors, but their magnitude was primarily attributable to excessive leverage: the firm used borrowing to leverage its holdings by an estimated factor of over 40 to 1.


pages: 413 words: 117,782

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

activist fund / activist shareholder / activist investor, algorithmic trading, Bear Stearns, Berlin Wall, Bob Litterman, bonus culture, book value, BRICs, business process, buy and hold, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, eat what you kill, Emanuel Derman, financial innovation, fixed income, friendly fire, Glass-Steagall Act, Goldman Sachs: Vampire Squid, high net worth, housing crisis, junk bonds, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, proprietary trading, radical decentralization, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, subprime mortgage crisis, systems thinking, The Nature of the Firm, too big to fail, value at risk

Goldman opens its first international office in London. 1971: Merrill Lynch goes public. 1972: Goldman starts a private wealth division and a fixed income division. Goldman pioneers a “white knight” strategy, defending Electric Storage Battery against a hostile take-over bid from International Nickel and Goldman rival Morgan Stanley. 1973: Fischer Black and Myron Scholes first describe their Black-Scholes model to price options. 1975: May 1 marks the end of fixed trading commissions in the stock market, forcing investment banks to compete in negotiations over transaction fees. 1976: After Gus Levy’s death, John L. Weinberg (Sidney’s son) and John Whitehead take over as senior partners and continue to build Goldman’s investment banking business.


pages: 437 words: 132,041

Alex's Adventures in Numberland by Alex Bellos

Andrew Wiles, Antoine Gombaud: Chevalier de Méré, beat the dealer, Black Swan, Black-Scholes formula, Claude Shannon: information theory, computer age, Daniel Kahneman / Amos Tversky, digital rights, Edward Thorp, family office, forensic accounting, game design, Georg Cantor, Henri Poincaré, Isaac Newton, Johannes Kepler, lateral thinking, Myron Scholes, pattern recognition, Paul Erdős, Pierre-Simon Laplace, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Feynman, Rubik’s Cube, SETI@home, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, traveling salesman, two and twenty

‘The family went on a trip to the World’s Fair in Spokane and on the way back we stopped at Harrah’s [casino] and I told my kids to give me a couple of hours because I wanted to pay for the trip – which I did.’ Beat the Dealer is not just a gambling classic. It also reverberated through the worlds of economics and finance. A generation of mathematicians inspired by Thorp’s book began to create models of the financial markets and apply betting strategies to them. Two of them, Fischer Black and Myron Scholes, created the Black-Scholes formula indicating how to price financial derivatives – Wall Street’s most famous (and infamous) equation. Thorp ushered in an era when the quantitative analyst, the ‘quant’ – the name given to the mathematicians relied on by banks to find clever ways of investing – was king.


pages: 526 words: 144,019

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History by Diana B. Henriques

Alan Greenspan, asset allocation, bank run, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Monday: stock market crash in 1987, break the buck, buttonwood tree, buy and hold, buy low sell high, call centre, Carl Icahn, centralized clearinghouse, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, cuban missile crisis, Dennis Tito, Edward Thorp, Elliott wave, financial deregulation, financial engineering, financial innovation, Flash crash, friendly fire, Glass-Steagall Act, index arbitrage, index fund, intangible asset, interest rate swap, It's morning again in America, junk bonds, laissez-faire capitalism, locking in a profit, Long Term Capital Management, margin call, Michael Milken, money market fund, Myron Scholes, plutocrats, Ponzi scheme, pre–internet, price stability, proprietary trading, quantitative trading / quantitative finance, random walk, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, The Chicago School, The Myth of the Rational Market, the payments system, tulip mania, uptick rule, Vanguard fund, web of trust

Thus, the holder of a futures contract would be obliged to buy or sell the underlying commodity on the date fixed by the futures contract, while an option holder would not be required to act. Leland could see that he needed a way: Bernstein, Capital Ideas, p. 272. the sudden inspiration that got him out of bed that night: He noted later that his idea was built on a body of other research, notably the work of Fischer Black and Myron Scholes, whose model for pricing options was the foundation of the emerging options markets. From an interview with Hayne Leland and John O’Brien, December 26, 2016 (hereafter “Leland–O’Brien interview 2016”). he needed Mark Rubinstein, his trusted friend: Ibid. He got his high school education at the Lakeside School: Bernstein, Capital Ideas, p. 274.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, British Empire, capital controls, carbon credits, carbon footprint, carbon tax, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency risk, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, Eyjafjallajökull, financial deregulation, financial engineering, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, high-speed rail, hiring and firing, inflation targeting, Irish property bubble, junk bonds, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, low interest rates, margin call, market clearing, megacity, megaproject, Mikhail Gorbachev, mini-job, mittelstand, Money creation, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, tail risk, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

The arc of credit complexity that led to the crisis began more benignly here, at 1620 Montgomery Street, San Francisco. Vasicek’s first innovation was to assess the probability of individual corporate loans defaulting. He used information from share prices to calculate ‘asset values’, also known as ‘enterprise values’. It drew on the theories of two of his friends, the Nobel prize-winners Robert Merton and Myron Scholes (later to come to grief at Long Term Capital Management). Vasicek’s formula estimated a probability of default based on the movement and volatility of the share price. It was a more timely and useful measure than, say, a credit rating. KMV was surprisingly successful at selling these default predictions for vast sums to financiers sceptical about the assessments of the Big Three credit-ratings agencies.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Alan Greenspan, Andrei Shleifer, anti-communist, Apollo 11, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Bear Stearns, Berlin Wall, Black Monday: stock market crash in 1987, Bletchley Park, Bob Noyce, Boeing 747, bond market vigilante , Branko Milanovic, Bretton Woods, Brexit referendum, British Empire, business cycle, call centre, capital controls, carbon footprint, carbon tax, Carl Icahn, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Babbage, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, cotton gin, credit crunch, Credit Default Swap, crony capitalism, cross-border payments, currency peg, currency risk, debt deflation, DeepMind, Deng Xiaoping, discovery of the americas, Donald Trump, driverless car, Easter island, Erik Brynjolfsson, European colonialism, eurozone crisis, Fairchild Semiconductor, falling living standards, financial engineering, financial innovation, financial intermediation, floating exchange rates, flying shuttle, Ford Model T, Fractional reserve banking, Frederick Winslow Taylor, full employment, general purpose technology, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, global value chain, Gordon Gekko, Great Leap Forward, greed is good, Greenspan put, guns versus butter model, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, hydroponic farming, Ignaz Semmelweis: hand washing, income inequality, income per capita, independent contractor, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Jon Ronson, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, Les Trente Glorieuses, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low interest rates, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, Modern Monetary Theory, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, scientific management, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, Suez canal 1869, TaskRabbit, techlash, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, world market for maybe five computers, Yom Kippur War, you are the product, zero-sum game

Mastered by the universe In 1997 and 1998, there was a crisis in emerging markets, which involved South-East Asia and a Russian debt default. Caught in the middle of all this was a hedge fund called Long-Term Capital Management (LTCM), run by some of Wall Street’s best-known bond traders and advised by two Nobel prize-winners in economics, Robert Merton and Myron Scholes. The fund followed a policy of risk arbitrage, buying less liquid assets with borrowed money. At one point, it borrowed 30 times its capital.36 This proved disastrous when markets fell, so banks refused to keep lending the fund money. A private sector bailout was organised and the Fed cut interest rates again.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

It is because many capital budgeting and financing decisions have options embedded in them. We discuss a variety of these options in subsequent chapters. 21-1 A Simple Option-Valuation Model Why Discounted Cash Flow Won’t Work for Options For many years economists searched for a practical formula to value options until Fischer Black and Myron Scholes finally hit upon the solution. Later we will show you what they found, but first we should explain why the search was so difficult. Our standard procedure for valuing an asset is to (1) figure out expected cash flows and (2) discount them at the opportunity cost of capital. Unfortunately, this is not practical for options.

., 857 Scenario analysis, 250, 564n Schaefer, A. M., 70 Schaefer, S. M., 684 Schall, L. D., 815n Schallheim, J. S., 646n, 654, 655 Scharfstein, D., 684, 842n, 866, 866n Scherer, F. M., 829, 829n Scherr, F. C., 798 Schmidt, R. H., 878 Schneider, C., 867, 867n Schoar, A., 471n Schofield, Adrian, 666 Scholes, Myron S., 402n, 415, 415n, 536, 536n, 545–551, 546n Schranzk, D., 587n Schultze, George J., 855n Schwartz, E. S., 278n, 570n, 580, 612n, 630, 885n Schwartz, Eduardo, 584n Schwartz, S. L., 332, 332n Schwert, G. W., 343 Sealed Air Corporation, 840 SEC. See U.S. Securities and Exchange Commission (SEC) Secondary issues, 385–390 Secondary markets, 76, 385–390 Secondary transactions, 360 Second law, Brealey, Myers, and Allen, 231n, 247n Second-stage financing, 373 Secured debt, 608 Securities.


pages: 819 words: 181,185

Derivatives Markets by David Goldenberg

Black-Scholes formula, Brownian motion, capital asset pricing model, commodity trading advisor, compound rate of return, conceptual framework, correlation coefficient, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, law of one price, locking in a profit, London Interbank Offered Rate, Louis Bachelier, margin call, market microstructure, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, price mechanism, random walk, reserve currency, risk free rate, risk/return, riskless arbitrage, Sharpe ratio, short selling, stochastic process, stochastic volatility, time value of money, transaction costs, volatility smile, Wiener process, yield curve, zero-coupon bond, zero-sum game

Black–Scholes derived from Bachelier, illustrating the important connection between these two models; 34. modeling non-constant volatility: the deterministic volatility model and stochastic volatility models; 35. why Black–Scholes is still important; 36. and a final synthesis chapter that includes a discussion of the different senses of risk-neutral valuation, their meaning and economic basis, and a complete discussion of the dynamics of the hedge portfolio in the BOPM, N=1. I would like to thank the giants of the derivatives field including: Louis Bachelier, Fischer Black, John Cox, Darrell Duffie, Jonathan Ingersoll, Kiyoshi Itô, Robert Merton, Paul Samuelson, Myron Scholes, Stephen Ross, Mark Rubinstein, and many others. I sincerely hope that the reader enjoys traveling along the path to understanding Derivatives Markets. David Goldenberg Independent researcher, NY, USA ACKNOWLEDGMENTS I would like to thank everyone at Routledge for their hard work on this book.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Big bang: deregulation of the City of London, bilateral investment treaty, book value, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, Carmen Reinhart, central bank independence, classic study, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, democratizing finance, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, military-industrial complex, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, proprietary trading, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, scientific management, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, stock buybacks, structural adjustment programs, subprime mortgage crisis, Tax Reform Act of 1986, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, vertical integration, very high income, Washington Consensus, We are all Keynesians now, Works Progress Administration, zero-coupon bond, zero-sum game

Available at fic.wharton.upenn.edu. 76 Quoted in Anna Fifield, “Obama in Tough Talk to ‘Fat Cat’ Bankers,” Financial Times, December 15, 2009. 77 “Glass-Stegall Lite,” Economist, January 2010. 78 Jay Newton-Small, “How Barney Frank Forged a Financial Reform Bill,” Time, June 26, 2010. 79 See the New York Fed’s own page on discount window operations. Available at newyorkfed.org. 80 See Thomas Cooley and Ingo Walter, “The Architecture of Financial Regulation,” in Myron Scholes, Viral V. Acharya, Thomas F. Cooley, and Matthew P. Richardson, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, Hoboken, NJ: Wiley, 2011, p. 45. The Act’s new “Special Resolution Regime,” which set out provisions to deal with the collapse of a SIFI, focused on the need for SIFIs to write “living wills” (that is, complex plans prepared in advance to ensure an orderly wind-down of operations), so as to allow creditors and equity-holders to take losses without destroying the system, and generally to make it easier for the Fed to try to contain financial crisis. 81 Eric Helleiner and Stefano Pagliari, “The End of Self-Regulation?”


pages: 620 words: 214,639

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

Alan Greenspan, asset-backed security, Bear Stearns, book value, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Glass-Steagall Act, Hyman Minsky, Irwin Jacobs, Jim Simons, John Meriwether, junk bonds, Long Term Capital Management, low interest rates, margin call, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, proprietary trading, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, Savings and loan crisis, savings glut, shareholder value, sovereign wealth fund, stock buybacks, too big to fail, traveling salesman, uptick rule, vertical integration, Y2K, yield curve

We march along in life, clearing.” Bear Stearns made $30 million a year clearing trades for LTCM. As has been well documented in Roger Lowenstein's bestseller, When Genius Failed, LTCM combined all of Meriwether's supposed trading expertise with the technical expertise of Nobel Prize—winning economists Robert Merton and Myron Scholes (the latter one-half of the duo that devised the widely used Black-Scholes option-pricing model)— and with the regulatory expertise of David Mullins, the vice chairman of the Federal Reserve Board, who resigned his position to join LTCM. It was a partnership designed to maximize the seduction of potential investors.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Crowder; and Hossein Kazemi (2010), The New Science of Asset Allocation: Risk Management in a Multi-asset World, Hoboken, NJ: John Wiley & Sons, Inc. Schoar, Antoinette (2008), “Capital flows and the returns to private equity,” presentation to the Institute for Quantitative Research in Finance (“Q Group”). Scholes, Myron S. (1972), “The market for securities: Substitution versus price pressure and the effects of information on share prices,” Journal of Business 45(2) 179–211. Serbin, Vitaly; Peter M. Bull; and Howard Zhu (2009), “The capacity of liquidity-demanding equity strategies,” Journal of Portfolio Management 36(1), 78–89.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

So as we take a quick tour through this part, I’ll point out some deficiencies along with the authors’ nuggets of wisdom that still ring true. One of the shortcomings shows up early in the first chapter of Part VII, in Chapter 46, “Stock-option Warrants,” which is on the accompanying CD. This chapter may well be the most dated. When the book was first published, the derivatives market was still in its infancy. Fischer Black and Myron Scholes had not yet developed their famous formula for valuing stock options, and the products that now pervade the financial markets—options, interest rate futures, swaps, swaptions, and so on—were not fixtures in the financial markets. Chapter 46 homes in on stock warrants, one of the few derivative securities available at that time.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

"Friedman doctrine" OR "shareholder theory", "RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, asset-backed security, Bear Stearns, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, diversified portfolio, do well by doing good, fear of failure, financial engineering, financial innovation, fixed income, Ford paid five dollars a day, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, junk bonds, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, managed futures, margin call, market bubble, mega-rich, merger arbitrage, Michael Milken, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, risk tolerance, Ronald Reagan, Saturday Night Live, short squeeze, South Sea Bubble, tail risk, time value of money, too big to fail, traveling salesman, two and twenty, value at risk, work culture , yield curve, Yogi Berra, zero-sum game

But, in the end, Goldman decided to be one of LTCM’s many trading partners on Wall Street. As has been well documented in Roger Lowenstein’s best seller, When Genius Failed, LTCM combined all of Meriwether’s supposed trading expertise with the technical expertise of Nobel Prize–winning economists Robert Merton and Myron Scholes and with the regulatory expertise of David Mullins, the vice chairman of the Federal Reserve Board, who resigned his position to join LTCM. It was a partnership designed to maximize the seduction of potential investors. Needless to say, LTCM was the envy of Wall Street—in the days before hedge funds were a dime a dozen—and firms rushed to do business with it, including Goldman.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, cross-border payments, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, Dutch auction, financial innovation, financial intermediation, fixed income, flag carrier, foreign exchange controls, full employment, Glass-Steagall Act, Goodhart's law, Greenspan put, guns versus butter model, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, land bank, large denomination, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market bubble, market clearing, market fundamentalism, Money creation, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Phillips curve, Ponzi scheme, price mechanism, price stability, profit motive, proprietary trading, prudent man rule, Real Time Gross Settlement, reserve currency, risk free rate, risk tolerance, risk/return, Savings and loan crisis, seigniorage, shareholder value, short selling, short squeeze, tail risk, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

The call option thus provides insurance against an oil price rise. This explains why the price of the option is called a premium: it is analogous to an insurance premium. VALUING AN OPTION Finding the exact value of an option is highly complex. Many finance professors spent several years trying to solve this problem before Fisher Black and Myron Scholes published the Nobel prize–winning Black-Scholes options pricing formula in 1973. The derivation of the formula requires stochastic calculus and is beyond the scope of this book. However, we can get surprisingly far just by employing no-arbitrage rules and simple arithmetic. First, we will learn the famous put-call parity relationship that links the prices of a put, call, stock, and bond.