Pricing the Future: Finance, Physics, and the 300-year Journey to the Black-Scholes Equation [NOOK Book]

Overview


Options have been traded for hundreds of years, but investment decisions were based on gut feelings until the Nobel Prize–winning discovery of the Black-Scholes options pricing model in 1973 ushered in the era of the “quants.” Wall Street would never be the same.

In Pricing the Future, financial economist George G. Szpiro tells the fascinating stories of the pioneers of mathematical finance who conducted the search for the elusive options pricing formula. From the broker’s ...

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Pricing the Future: Finance, Physics, and the 300-year Journey to the Black-Scholes Equation

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Overview


Options have been traded for hundreds of years, but investment decisions were based on gut feelings until the Nobel Prize–winning discovery of the Black-Scholes options pricing model in 1973 ushered in the era of the “quants.” Wall Street would never be the same.

In Pricing the Future, financial economist George G. Szpiro tells the fascinating stories of the pioneers of mathematical finance who conducted the search for the elusive options pricing formula. From the broker’s assistant who published the first mathematical explanation of financial markets to Albert Einstein and other scientists who looked for a way to explain the movement of atoms and molecules, Pricing the Future retraces the historical and intellectual developments that ultimately led to the widespread use of mathematical models to drive investment strategies on Wall Street.

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Editorial Reviews

From the Publisher

Franklin Allen, Nippon Professor of Finance and Economics, The Wharton School of the University of Pennsylvania
“George Szpiro has written a wonderful book.  Often finance is viewed as one of the driest of fields.  Szpiro makes the history of the option pricing formula fascinating at many levels.  He starts with the history of options, bringing in the Tulipmania, the Dutch East India Company, the Amsterdam Bourse, Joseph de La Vega, John Law’s colorful life and on and on.  The mathematical tools needed for deriving the formula and the people who developed them are also heroes of the tale.  The climax is reached with Fisher Black, Myron Scholes and Robert Merton’s time together at MIT and the derivation of the formula that revolutionized finance.  It is a book that is very difficult to put down.  This will be true for beginning students of finance as well as the highest earning traders.  I thoroughly recommend it!”

Andrew Lo, Harris & Harris Group Professor of Finance and Director of the Laboratory for Financial Engineering, Massachusetts Institute of Technology
"This is a fascinating historical account of the origins of modern finance and the Black-Scholes/Merton option-pricing formula, by a consummate expositor who also happens to be a first-rate financial economist.  Those who think finance is a science will be surprised by the serendipitous events that delayed the discovery of the option-pricing formula by 73 years; those who think finance is an art will be shocked by the deep connections between option-pricing, physics, and probability theory.  No matter what your background, you'll want to read this book slowly—like a rare vintage port, it's meant to be sipped slowly and every drop savored."
 
Robert P. Inman, Richard K. Mellon Professor of Finance and Economics, The Wharton School of the University of Pennsylvania
“One of the major intellectual achievements of the 20th century was the theory of option pricing. This is its story, and it’s absolutely fascinating.   Options have been around since the buying and selling of tulips and the very first efforts of investors to control their downside risk. But the economic value of such protections was not finally understood until the Nobel Prize winning research of Fischer Black, Myron Scholes, and Robert Merton in the 1970’s.   It could not have happened without 350 years of serious thinking by botanists, physicists, chemists, and mathematicians.   Finally, by 1960 all the pieces were in place, and Black, Scholes, and Merton solved the puzzle. The book should be required reading of all first year PhD students in finance, and economics, simply to see what is needed for path-breaking research.   For the rest of us with an interest in the origins of important ideas, this is a great read.”

Sylvia Nasar, author of Grand Pursuit: The Story of Economic Genius and A Beautiful Mind: The Life of Mathematical Genius and Nobel Laureate John Nash  “George Szpiro’s crisp prose, clever vignettes and refreshingly concise explanations make finance history go down like gelato on a summer’s day.” 

Kirkus Reviews
“Szpiro unravels the complexity of the Black-Scholes equation and its fascinating relationship to Einstein’s application of statistics in explaining the random motion of molecules and to Norbert Wiener’s discovery of Cybernetics.  In the case of options, it is option prices rather than molecules that jiggle. . . . An interesting history of mathematics and its application to economics and the world of high finance.”

Booklist “Recounting the lineage of the options pricing equation, Szpiro launches from an example of irrational exuberance that led to ruin—Holland’s tulip mania in the 1630s—into the Paris bourse of the late 1800s, when a series of math-minded characters pondered the pricing problem. As their biographies, some quite dramatic and tragic, carry his narrative forward, Szpiro covers how they borrowed from physics its formulas about the random movement of atoms, which they then applied to volatile stock prices. . . . Szpiro’s tale should fascinate readers who follow the markets.”

Kirkus Reviews
Mathematician and financial economist Szpiro (Numbers Rule: The Vexing Mathematics of Democracy, From Plato to the Present, 2010, etc.) chronicles the co-evolution of modern finance, physics and statistics. In 1997, the Nobel Prize was awarded to economists Myron Scholes and Robert Merton for determining "the true value of an option," just one year before the billion-dollar hedge fund they founded nearly collapsed global financial markets. The prize was based upon their discovery--along with their deceased collaborator Fischer Black--of a formula that laid the basis for computerized derivatives trading. In the author's opinion, despite the spectacular real-world failures of their model, which also contributed to the 2007 economic crisis, on a scientific level, their achievement "is a landmark achievement of the twentieth century." While this may strike readers as unwarranted hyperbole, Szpiro unravels the complexity of the Black-Scholes equation and its fascinating relationship to Einstein's application of statistics in explaining the random motion of molecules and to Norbert Wiener's discovery of Cybernetics (based on his World War II work on target acquisition). In the case of options, it is option prices rather than molecules that jiggle. The author devotes most of the text to tracing "the historical and intellectual developments that led to the options pricing formula," beginning more than 300 years ago with the tulip bubble, when frenzied speculators drove the price higher and higher until the bubble burst and buyers defaulted on future contracts. An interesting history of mathematics and its application to economics and the world of high finance.
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Product Details

  • ISBN-13: 9780465028153
  • Publisher: Basic Books
  • Publication date: 11/29/2011
  • Series: NONE Series
  • Sold by: Barnes & Noble
  • Format: eBook
  • Pages: 320
  • Sales rank: 753,534
  • File size: 620 KB

Meet the Author


George G. Szpiro is a mathematician, financial economist, and journalist. He is the Israel correspondent of the Swiss daily Neue Zürcher Zeitung and has published in Science, Nature, and the Jerusalem Report. He is the author of Kepler’s Conjecture, The Secret Life of Numbers, Poincaré’s Prize, and Numbers Rule. He lives in Switzerland.
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Table of Contents

Preface ix

Introduction xi

1 Flowers and Spices 1

2 In the Beginning 21

3 From Rags to Riches 37

4 The Banker's Secretary 55

5 The Spurned Professor 73

6 Botany, Physics, and Chemistry 81

7 Disco Dancers and Strobe Lights 109

8 The Overlooked Thesis 125

9 Another Pioneer 137

10 Measuring the Immeasurable 143

11 Accounting for Randomness 161

12 The Sealed Envelope 169

13 The Utility of Logarithms 181

14 The Nobelists 195

15 The Three Musketeers 211

16 The Higher They Climb 229

17 The Harder They Fall 241

18 The Long Tail 255

Appendix 259

Notes 263

Bibliography 277

Index 283

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Sort by: Showing all of 2 Customer Reviews
  • Anonymous

    Posted March 13, 2012

    Long an wande Longer than needed

    The topic couldve been summed up in 20 pages but it was drawn out to 220. Lots of info that is not particularly memorable.

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  • Anonymous

    Posted March 9, 2012

    No text was provided for this review.

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