<b>It's not every day that someone writes down an equation that ends up c...

Terrence Miao - 2012-04-29 08:21:05+1000 - Updated: 2012-04-29 08:21:05+1000

It's not every day that someone writes down an equation that ends up changing the world. But it does happen sometimes, and the world doesn't always change for the better. It has been argued that one formula known as Black-Scholes, along with its descendants, helped to blow up the financial world.

"By 2007 the trade in derivatives worldwide was one quadrillion (thousand million million) US dollars - this is 10 times the total production of goods on the planet over its entire history."

After Black-Scholes it was the computer that said yes, or no.

Read more: http://en.wikipedia.org/wiki/Black%E2%80%93Scholes

One maths formula and the financial crash

David Martin - 2012-04-29 16:39:50+1000

This type of story really annoys me - it is not the fault of the equation or the people who discovered it, it is the stupid people who tried to use it to make money without knowing anything about the maths involved and its limitations. Put the blame where is really belongs, on the greedy idiots who misused it not the smart ones who created it.

Terrence Miao - 2012-04-30 08:05:56+1000

Good point David. It's greedy and ruthless borrowing and lending caused GFC. Blaming on one math formula makes a laughable excuse. It's cheap trick I reckon that journalist used to attract more eyeballs.

But it's interesting to know the history of Black-Scholes formula drives behind option investment.

Oleg Kiorsak - 2012-04-30 12:52:13+1000

greedy? - yes! "stupid" - not so sure... some folks made shitloads of money and happily walked away with it! ;)

David Martin - 2012-04-30 18:04:20+1000

I take your point about the money some people (men) made, but I think the "stupid" label can still fit - depends on your personal value system and what you consider "smart" ;) These people applied a formula they didn't understand and most aren't capable of understanding. I suspect you'll find that most of them still don't understand why their application of the maths failed.

Oleg Kiorsak - 2012-04-30 18:13:18+1000 - Updated: 2012-04-30 18:15:24+1000

in this context (and in my system of values) the "not"-"stupid" equates to "smart ass"es who think of the rest of the public are "stupid" for not catching them and making accountable for their irresponsible actions...to make one realize they actions as stupid they need to face the consequences... as far as I am aware this did not quite take place or if it did it happened in inverse proportion to the benefit been ripped out of this... (ie the ones - closer to "top' who benefited the most got away and with more net profit then the ones at the "bottom")...??

Oleg Kiorsak - 2012-04-30 18:28:48+1000

I could see the argument that some maybe did it out of sincere "stupidity" rather with cold intent cynically knowing what their are doing...
but given we're talking about serious financial institutions it's hard to believe they did not foresee the end result...
essentially as smart as that math thing might of appeared, it is kinda obvious that, once everyone starts using it there is no way it will work same way as when only one player uses it... as it is, at the end of the day, a zero-sum game and money cannot be generated out of air for too long...