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

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Overview

For the past few decades, the financial world has often displayedan unreasonable willingness to believe that "the model is right,the market is wrong," in spite of the fact that these theoreticalmachinations were largely responsible for the stock market crash of1987, the LTCM crisis of 1998, the credit crisis of 2008, and manyother blow-ups, large and small. Why have both financial insiders(traders, risk managers, executives) and outsiders (academics,journalists, regulators, the public) consistently demonstrated ...

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Overview

For the past few decades, the financial world has often displayedan unreasonable willingness to believe that "the model is right,the market is wrong," in spite of the fact that these theoreticalmachinations were largely responsible for the stock market crash of1987, the LTCM crisis of 1998, the credit crisis of 2008, and manyother blow-ups, large and small. Why have both financial insiders(traders, risk managers, executives) and outsiders (academics,journalists, regulators, the public) consistently demonstrated awillingness to treat quantifications as gospel? Nassim Taleb firstaddressed the conflicts between theoretical and real finance in histechnical treatise on options, Dynamic Hedging. Now, inLecturing Birds on Flying, Pablo Triana offers a powerfulindictment on the trustworthiness of financial theory,explaining-in jargon-free plain English-how malfunctions in thesequantitative machines have wreaked havoc in our real world.

Triana first analyzes the fundamental question of whetherfinancial markets can in principle really be solved mathematically.He shows that the markets indeed cannot be tamed with equations,presenting a long and powerful list of obstacles to prove hispoint: maverick unlawful human actions rule the markets, unexpectedand unimaginable events shape the markets, and historical data isnot necessarily a trustworthy guide to the future of the markets.The author then examines the sources of origin of many prevalenttheories and mathematical dictums. He details how the field offinancial economics evolved from a descriptive discipline to anabstract one dedicated to technically concocting professors' ownversions of how such a world should work. He goes on to explain howWall Street and other financial centers became eager employers ofscientists, and how scientists became eager employees of financialfirms. Triana concludes with an in-depth discussion of the mostsignificant historical episodes of theory-caused real-life marketmalaise, with a strong emphasis on the current credit crisis.

In the end, Lecturing Birds on Flying calls for theradical substitution of good old-fashioned common sense in place ofmathematical decision-making and the restoration to financial powerof those who are completely unchained to the iron ball ofclassroom-obtained qualifications.

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Editorial Reviews

From the Publisher
"Points to the over-reliance on financial models and quantitative techniques as what ultimately brought down the financial markets. Sure, many of us feel that we have heard enough on this topic-do we really need another book about the financial mess and how it all began? Yes, we do. . . Triana's impressive knowledge and experience allows him to dig deeper and go beyond the mere musings of his published peers."
—Risk Management Magazine

"Readers of this book may make quite a lot of noise. . . Some will cheer out loud; others will yelp as cherished beliefs are torn into. At times, the book is deliberately incendiary. Triana is trying to stimulate debate. . . On the whole, this is a good read."
—The Financial Times, July 23rd 2009

"...calls for a return to "good old fashioned commonsense decision making"."
—Daily Express, June 4th 2009

"This book explains how it is that theoretical finance can fail dramatically in the real world."
—Finanace & Management Faculty, June 2009

"The book is fizzing with ideas"
—The Economist, June 29th 2009

" Triana’s book will ruffle a lot of feathers, but it also will make many readers think hard."
—BizEd

"A deeply unsettling insider account of how bogus mathematics overtook finance and was a key contributor to the financial collapse of 2008-2009 . . . With deep insight, Triana deconstructs the "pillars" of mathematical finance . . . Like Nassim Taleb, celebrated author of The Black Swan (2007), Triana is calling for major surgical reform of such business schools' curricula. An important addition to our deeper understanding of how finance must be reformed."
—Hazel Henderson, Ethical Markets

"Should the Nobel Prize for economics be abolished? That is one of the suggestions in Pablo Triana's provocative book "Lecturing Birds on Flying: Can Mathematical Theories Destroy the Markets?" . . . As Nassim Nicholas Taleb writes in his witty introduction to the book, giving someone the wrong map is worse than giving them no map at all. . . a good read. Some may find the elaborate prose closer to Cervantes than to, say, Nobel Prize winner Robert Merton — annoying. But perhaps Cervantes is the right writer to emulate when tilting at windmills. "
—LA Times

"The highlight of Triana's book is his valuable insights into the problems with mathematical economic models, which make his argument quite forceful."
—Shanghaidaily.com

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Product Details

  • ISBN-13: 9780470406755
  • Publisher: Wiley
  • Publication date: 6/9/2009
  • Edition number: 1
  • Pages: 400
  • Sales rank: 445,909
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.50 (d)

Meet the Author

Pablo Triana has successful derivatives experience at all levels: on the trading floor and as a professor, consultant, and author. He is a frequent contributor to business publications, including the Financial Times, Forbes.com, Breakingviews.com, and Risk magazine, among others. Triana is also the author of Corporate Derivatives. He holds a master of science from the Stern School of Business, New York University, and a master of arts from American University.

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Table of Contents

Foreword.

Preface: An Evening at NYU, Taleb's Article, and a CreditCrisis.

Mathew Gladstein's Complaisanc.

ESSENTIALS.

CHAPTER 1 PLAYING GOD.

It's tough to model human action.

Finance is not as religious as physics.

Black Swans make things harder.

The markets are not Normal and the past is a faulty guide.

Should we care that theorists persist?

CHAPTER 2 THE FINANCIAL ECONOMICS FIEFDOM.

Virginity matters.

When describing reality was okay.

It's the incentives, stupid.

Many obstacles to reform.

Heeding Fischer Black's message.

CHAPTER 3 QUANT INVASION.

Machine learning comes to finance.

It's a computational thing.

Models live here, too.

Quant punting.

Interesting enough for a movie.

CRITIQUE.

CHAPTER 4 COPULATED NIGHTMARES.

Abrupt reform, if not so much prison.

Modeling death.

The 2005 pre-warning.

Rating us into hell.

A disapproving grin.

CHAPTER 5 BLAH VaR BLAH.

Insalubrious charlatanism.

Tracking a true culprit.

Credit truths.

A long rap sheet of evidence.

The police are in on it.

CHAPTER 6 BLUE IS NOT GREEN.

Lehman did die.

Anything is possible.

Buffett versus the Black Swan.

Stubbornly holding the theoretical fort.

An end to indoctrination.

CHAPTER 7 THE BLACK-SCHOLES CONUNDRUM.

Once upon a time at MIT.

Frowning, not smiling.

How Black was that Monday.

A devastating KO.

The Taleb & Haug critique.

CONCLUSIONS.

CHAPTER 8 BLACK SWAN DECEIT?

The tired “perfect storm” alibi may be a facade.

Indoctrinating clients and investors.

The unseemly marketers of academic dogma.

Do as I say, not as I do.

Glorifying complexity.

CHAPTER 9 AN UNHEALTHY YEARNING FOR PRECISION.

Dangerous voluntary enslavement.

Let freedom ring.

Normality can kill you.

A VIXing issue.

Protect those derivatives.

CHAPTER 10 WE NEED FAT TONY.

FINALE SHOULD THE NOBEL PRIZE IN ECONOMICS BEELIMINATED?

Notes.

Acknowledgments.

About the Author.

Index.

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Customer Reviews

Average Rating 4.5
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Sort by: Showing 1 – 3 of 2 Customer Reviews
  • Anonymous

    Posted January 16, 2014

    Apprentince bird den

    Where the apprentinces rest and learn how to avoid attacks from bigger birds or enemies.

    Was this review helpful? Yes  No   Report this review
  • Posted October 5, 2009

    more from this reviewer

    A pithy, passionate polemic

    This is a passionate attack on quantitative financial theory and its influence on business schools and the managers of financial institutions. Financial theorists, Pablo Triana says, are like ornithologists whose birdbrained formulas can't even come close to approximating the experience of flight. If you have maintained a regular acquaintance with advances in the financial markets, for example, by reading newspapers, you may already be familiar with Triana's analysis. He relies heavily on the ideas of Nassim Taleb and Emanuel Derman, who explain that people who have experienced improbable events overestimate the chance that such events will recur, while others underestimate it. In this rambling overview, Triana also refers to some of his own previous analyses. He presents a forceful summary of the problems with mathematical economic models. getAbstract finds that he offers good and valuable insights, though not necessarily innovative ones, and recommends his book to investors, financial analysts and thick-skinned economists.

    Was this review helpful? Yes  No   Report this review
  • Anonymous

    Posted January 17, 2010

    No text was provided for this review.

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