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Lecturing Birds on Flying
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Lecturing Birds on Flying

Can Mathematical Theories Destroy the Financial Markets?

Pablo Triana
Wiley, 2009
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Editorial Rating

7

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Recommendation

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.

Summary

People Aren’t Particles

Financial economists have constructed a discipline in the image of physics, with similar mathematical models. However, the mathematical approaches that work in physics are irrelevant to finance, for one reason: Physicists study particles, and particles do not make up their own minds. Economists study the results of human decision making, and people are not predictable.

Thus, the search for a science of finance is doomed to fail. Not only are people unpredictable, but the full consequences of their decisions are unknowable. The great stock market crash of 1929, the Latin American debt default of the 1980s and the global financial crisis that began in 2007 with faltering real estate prices are still playing themselves out.

Although people are unpredictable, they often appear to be quite the opposite. Much of the time, the outcomes of human decisions fall within a fairly narrow range. However, more often than financial economists and the managers of major financial institutions expect, the results of human decisions fall far outside that narrow range. Markets surge dramatically and inexplicably, and crash without warning. Financial models...

About the Author

Pablo Triana is a derivatives trader and a frequent contributor to such publications as the Financial Times and Forbes.com. He is the author of Corporate Derivatives.

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