Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? 1st Edition by Pablo Triana (PDF)

Description

LECTURING BIRDS ON FLYINGFor the past few decades, the financial world has often displayed an unreasonable willingness to believe that “the model is right, the market is wrong,” in spite of the fact that these theoretical machinations were largely responsible for the stock market crash of 1987, the LTCM crisis of 1998, the credit crisis of 2008, and many other blow-ups, large and small. Why have both financial insiders (traders, risk managers, executives) and outsiders (academics, journalists, regulators, the public) consistently demonstrated a willingness to treat quantifications as gospel? Nassim Taleb first addressed the conflicts between theoretical and real finance in his technical treatise on options, Dynamic Hedging. Now, in Lecturing Birds on Flying, Pablo Triana offers a powerful indictment on the trustworthiness of financial theory, explaining—in jargon-free plain English—how malfunctions in these quantitative machines have wreaked havoc in our real world. Triana first analyzes the fundamental question of whether financial 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 his point: maverick unlawful human actions rule the markets, unexpected and unimaginable events shape the markets, and historical data is not necessarily a trustworthy guide to the future of the markets. The author then examines the sources of origin of many prevalent theories and mathematical dictums. He details how the field of financial economics evolved from a descriptive discipline to an abstract one dedicated to technically concocting professors’ own versions of how such a world should work. He goes on to explain how Wall Street and other financial centers became eager employers of scientists, and how scientists became eager employees of financial firms. Triana concludes with an in-depth discussion of the most significant historical episodes of theory-caused real-life market malaise, with a strong emphasis on the current credit crisis. In the end, Lecturing Birds on Flying calls for the radical substitution of good old-fashioned common sense in place of mathematical decision-making and the restoration to financial power of those who are completely unchained to the iron ball of classroom-obtained qualifications.

User’s Reviews

Reviews from Amazon users which were colected at the time this book was published on the website:

⭐very informative, but a bit repetitive

⭐The blame game for the current “financial crisis” is ongoing, with an intensity and volatility that is going way beyond the pale of any acceptable standards of human discourse. As this book is an excellent example of, the level of vituperation and ridicule is reaching the stratosphere, and shows no sign of abatement. At least for this reviewer, this book was tough to read, not because its technical content is difficult, which it is not, but rather because of the steady and irritating commentary on part of the author. In addition, he seems to switch from one position to its opposite, as if he flipped a coin while writing the book, with his stance depending on which side of the coin came up. In one part of the book he is excoriating the practitioners of “pure mathematical finance” for the bringing down of the markets. Just a few pages later he is revealing to the reader that such an approach was not even used at all, or at least minimally.Between these Markov transitions from one position to the next, the author is busy indulging himself in distasteful and unprofessional ridicule of the “arrogant” and “self-serving” financial theorists who never spent a minute on the trading floor, and who were responsible for “terrible, theory-ignited mischief.” Risk management he asserts should be handed back to “freethinking, gumption-honoring, innumerate chums”. In other words, the financial decision-making should return to the use of “old-fashioned commonsense.” Throughout the book he lifts up the quasi-mythical “Black Swan” symbolism in order to justify his belief in the power of “rare events” and the inability of VAR models to account for them.One can certainly commend the author’s rejection of social and intellectual hierarchies, and his encouragement of this rejection to the reader. Degrees, accolades, and exaggerated recommendations mean nothing when it comes to describing and understanding real systems. The only thing that matters is evidence, and this comes at a high cost, both in dollars and in time. The obtaining of true knowledge is difficult, and frequently must be done without worrying about recognition or monetary compensation. A high degree of mental discipline is required, along with large blocks of time.But rebellion against authority and word arrows fired against stuffy, arrogant mathematicians does not prove a thesis. The author has failed to prove his in this book, in spite of the title and the page count. Indeed the writing and logic is confused and leaves the reader wanting as to what the author is really asserting:- Quantitative finance is derided for its potential to “sow the seeds of market chaos” but the author does not define what “market chaos” is nor entertain the possibility that chaotic dynamics in a financial market may indeed be an efficient way of allocating capital and labor. There are several systems of interest, such as data networks and the human neural system, which depend on chaotic dynamics for their proper functioning.- Financial engineers are scolded about their attempts to predict future market movements by sole reference to the past, but the author then praises the financial savvy of “commonsense” traders who acquired their knowledge and expertise by years of trading.- In attempting to explain the (in his opinion, unjustified and reckless) adoption of techniques from quantitative finance, he author claims that it was also due to regulatory agencies or public relations but does not give one example, even anecdotal, to support this. Which regulatory and advertising agencies were involved?- The 1987 “crash” is blamed on Black-Scholes-inspired trading strategies, but no convincing evidence is given anywhere in the book. And along these same lines the author refers to this as a “cataclysm”, as do a few others in the financial press. But it would be just as easy to refer to it as merely a market correction, considering the behavior of the market a few days after “Black Monday.” And just because a collection of wealthy people lose a lot of money does not mean that it is a “cataclysm.”- The claim that no mathematical model can capture the intricacies of human psychology. This is not true, as research into cognitive neuroscience will reveal. Although much work remains to be done in this area, it is progressing with all deliberate speed.- The author asserts that humans are so unpredictable in their financial dealings that not even a “Prophet” could sort it all out. Humans “change the rules constantly”. But on the other hand many times in the book he is proclaiming the wisdom of Leo-Malamed-type “commonsense” traders to do just that. Apparently folk wisdom and “commonsense” can “untangle” the “conundrums” of the financial markets. How many commonsense “chums” were actively involved in the 1929 Crash, the Latin American banking crisis in the 1980’s, Black Monday in 1987, the bond market meltdown in 1994, the Asian 1997 crisis, the 1998 Russian default, the 2000 NasDaq crisis, the 2001 Enron Bankruptcy, and the 2002 WorldCom bankruptcy? None at all? Predominantly?- What evidence is there that “outliers” are “created by people who don’t believe in outliers”? Has the author studied this real-time, or can he give some sort of historical evidence supporting this claim? Can a collection of people doing trading on a “assumption of normality” actually give results that are “non-normal”? How would one study this phenomenon? It seems the author is making a prediction here. But from dialog throughout the book, he ridicules the attempts to make predictions on human financial behavior.There are many more outrageous claims that would add to this list, but space restricts this reviewer from going any further. To substantiate the claims that the author is making in this book would swell its pages to number in the thousands. It is a tiresome collection of ranting and ridicule, and adds nothing to the debate on the efficacy of quantitative finance. From working in financial modeling, this reviewer has always encountered extreme skepticism regarding mathematical modeling on the part of senior management. But these examples are purely anecdotal, and it would take many years to show that this is widespread, or that the converse is true.If one humble lesson could be taken from reading this book it is that the financial markets of the twenty-first century rattle and intimidate some people, even seasoned traders and financial professionals. Yes, there are complicated mathematical constructions that are employed to describe financial markets and that are used to trade securities. But this reviewer looks forward to more mathematics in finance, not less, in the years ahead. Even better, and this is certainly on the horizon, is a situation where the commonsense of human financial dealings is completed automated into the technology used to implement financial transactions.

⭐Pablo Triana is a master finance wizard, he consorts with Nassim Talib, Espen Haug and is intimately familiar with other so called uber analysts, to present evidence of the market and analyst finance shortcomings regarding worshipping mythical math formula’s under the guise of “academic showmanship”. Much more than that, the book extols the mysteries of Quant speak, regarding VaR (value at risk)and Gaussian Copula basis and theoretical uses in today’s markets.The catch? You ignore human emotional thinking and you can stick that math formula up your nose! don hall / bearcreekresearch

⭐I read Nassim Nicholas Taleb books, “Fooled by Randomness” and “…Black Swan”; so I figured (regrettable, on hindsight) given that Taleb wrote the foreword then the book would be on par with his books! I was wrong.Negatives:The book is way too repetitive! -Imagine going for >74 pages (that’s the longest chapter, #7) of repetition. Not only is he repeating lines from other chapters, no…. at times from the the same paragraph!The writing style is rather weird. – At some point he mentions Victor Niederhoffer by name and then at another chapter, he talks about the same story but this time it’s no longer Victor but rather a “famous speculator” – Again, he mentions Emanuel Derman by name and then in another chapter, he talks about the same story but this time, it’s not longer Emanuel but it’s now a “…famous quant/academic…”! – I coud go on….Positive(s):His understanding of the subject is not in question, at least not by me!His opinions on VaR, BSM.His opinions on the need for change, especially the financial economics professors’ influence in the real world of financeThe relating of his work experience is another positiveAll in all, I’d rather pass on the book, for I can assure anyone that the repetitiveness will be found very annoying.

⭐If you are a trader you will love this book because it demonstrates what we all know that the egg heads are no where. They almost brought down the country. It is a fun read, has great lines and history and will expand your knowledge. I would not miss this one. I would love to meet the author. Buy it. I love this book!!!The only negative reviews are by the egg heads.

⭐I was attracted to this book partly by the intriguing title, but mostly by the fact that the foreword was written by Nassim Nicholas Taleb, the author of 2 fascinating books on roughly the same material, “Fooled by Randomness” and “The Black Swan”.I was expecting more of the same from Triana, but with perhaps a slightly different viewpoint and possibly more details. What I got was a 350 page polemic from a confirmed math phobe and a slavish paen to Taleb. OK, Black-Scholes is not a great idea and VAR greatly underestimates market risk, but to repeat this theme again and again borders on the lunatic.But that’s not all, here’s a quote from p. 203 that sums up the style of writing; he’s referring (endlessly) to Black-Scholes-Merton and, in this case, to the S&P 500 volatility surface: “…Obviously, horizontal is not the same as curved. A curved line is a complete violation of BSM. Horizontal is not the same as curved. The end results are not BSM-compliant any more. It’s not BSM. Curved is not horizontal. It’s something else. BSM endorses horizontality. BSM negates curvedness. It can’t be BSM. Curved is not horizontal”. I kid you not.The message of the book, delivered amply in Taleb’s foreword and elsewhere, is that too often in the past econometric models put foward by the likes of Merton, Scholes and others have been blindly followed by market makers and regulators, with resultant disastrous effects. Unfortunately, Triana adds little additional insight and commits the greatest of all faults an author can make–to bore the reader.

⭐I bought this book having read Fooled by Randomness and The Black Swan. Unfortunately, all this book seems to do is take most of its ideas from them and add nothing new to the mix.Unlike Fooled by Randomness and The Black Swan (both must reads for anyone interested in finance) this book is not easy to read without an understanding of derivatives. I lost count of the amount of times I had to refer to Google to lookup what a term meant or clarify what the author casually mentioned.My advice, read Fooled by Randomness and The Black Swan instead.

⭐Is Finance Theory an Oxymoron ?The latest Occam’s razor award goes to Her Majesty the Queen. In the unlikely surroundings of the London School of Economics, she last week cut to the quick. Describing the credit crunch as “awful”, she tapped a gilded economist on the proverbial shoulder and asked: “Why did nobody notice?”Simon Jenkins The Guardian, Wednesday 12 November 2008It was reported that the gilded economist was at a loss for words. What he could have said was: “Your Majesty, may I suggest that you read `Lecturing Birds on Flying’ or `Can Mathematical Theories Destroy the Financial Markets’, by Pablo Triana.This timely tome may not have all the answers, but it certainly can shed much light on why many seemingly sophisticated financial products turned out to have been poorly constructed. Triana shows how Nobel Prize winning Economists created brilliant theories that were based on assumptions from an ideal Platonic universe. The brilliance of the theories, as recognised by the “Nobel” Judges, obscured their less than realistic foundations. A leading suspect was the use of the Gaussian Copula Model, more familiar to most people as the Normal Distribution or Bell Curve. It describes the distribution of many things in nature that are not interconnected; for instance the range of the heights of pupils in a class at school.Pablo Triana, like Nassim Taleb, who wrote the foreword, believes that in the financial world it is highly likely that the data is distributed in a somewhat similar way to the Bell Curve in the centre but with far more outlier events than the Bell Curve would predict. Statisticians would say that the curve has fat tails. Taleb calls these outlier events `Black Swans’. Rather than a Normal Distribution a better representation of the Financial World may be a Levy Distribution, where a 99% confidence interval can shelter five or six Standard Deviations as opposed to less than three under a Normal Distribution.With beautiful English understatement Paul Ormerod summed this up: “The record of economists in understanding and forecasting the economy at macro-level is not especially impressive”. Even a study at INSEAD concluded, dryly: “Statistically complex methods do not necessarily produce more accurate forecasts”.The great danger, of course, is that the theories give some people an illusion of certainty of future outcomes, which they, and others, may find exceedingly expensive. LCTM is an example that springs to mind.It could be said in defence of the theories that the Black Scholes Merton model is used all the time for Options pricing, so it must be correct. Or does the `volatility smile’ suggest that in fact there is scope for financiers to adjust the formula to give the answers that the market would like ?Surely so many Nobel Prize Winning Economists could not be wrong – but is there even really a Nobel Prize in Economics ?One should always check one’s assumptions ! Answer on Page 311.

⭐著者さんはスペイン人のようです。色彩豊かでエキゾチックな英語です。くどいレトリックの狭間から激情が溢れてきます。これが演説ならば絶対に拳を振り上げての大きなジェスチャーを伴ったに違いない。非英語ネイティブが英語で物を書いてくれるのは有り難いなぁ、と私は感動しました。ただし、あまりに熱くてくどくて、うな丼とカツ丼とステーキを一気に食わされたような気分にはなります。げふ。ともあれ、金融素人でも文学的に読めてしまう金融本でした。金融工学の誕生、発展、実世界への浸入、浸透、利用、悪用、欺瞞、偽装、瓦解のメカニズムを解説しています。統計学とか確率論などとは無縁の素人読者に素人読者から助言があるとすれば、｢正規分布｣という概念が金融工学の根っ子に腰を据えているらしい、と一応把握しておくといいと思います。この概念を基に構築されたCAPMやらブラックショールズ方程式やらGaussian CopulaやらVaRやらが金融界に巨大な影響を与えてきたと。素人の把握するところでは、これはリスク管理のマニュアル化です。才能や勘や経験という人間が全存在を掛けて行使する「生の判断力」に金融工学マニュアルがとって代わったということらしい。どの分野でも大量の石にごく一部の玉が存在するのが必然な訳ですが、金融工学というのは｢石の味方｣だったということでしょうか。もうこれは読んで頂くしかない。読んで下さい。普遍的なテーマを訴える情熱的な一冊です。私はと言えば、著者の訴えはその気風の良さにも関わらず最後には｢荒野の叫び声｣のように聞こえてきました。ラクが出来るマニュアルがあるならそれを使うだろう。それが例え偽りであろうとも。皆が使うならば言い訳も立つ。真実が虚空ならば偽りの物語を求め、真実が暗黒ならば偽りの光を求めるだろう。人類滅亡まで繰り返される問いかけです。幻想を選ぶか真実を選ぶか、と。しかしたまに変わり者が現れて「嘘は嘘だ！」と言ってくれれば、僅かの救いにはなるというもので。

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⭐このタイトルはどう訳したらいいのかな？「猫に真顔で説教する」といった感じかな？タイトルの解釈は別として、副題が全てを物語っています。そして本書のメッセージと批判のトーンは過激です。アメリカ人が金融工学に対してここまでの根源的な批判をこれほどの過激な言葉を使って行ったケースは初めてみました。この批判の激しさは実際に読んでその言葉の使い方を見てみなければわかりません。金融工学の「イデオロギー性」とその数量化と数学モデルの美的な精緻化への情熱への背後に潜む世界観（

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⭐Fischer Black and the Revolutionary Idea of Finance

⭐）までが、批判の深いインプリケーションを意識することなく、批判されているほどです。金融工学は間違っているだけでなく、実際にトレーダーには使われておらず（というより誤用されている）、そのモデル化と理論化への情熱とその現実への適用は、結果として金融市場の混乱と崩壊を引き起こしているという逆説までが容赦なく指摘されます。この文脈の中で、VARの危険性と無意味さ、Black schoels modelに伴うdynamic hedgingの金融市場にもたらす破壊的な増幅効果が詳細に論述されます。間違った金融工学モデルに基づいたリスク管理こそが信用市場の崩壊を引き起こしたわけです。そういう意味では、「ユートピアを求めてディストピアにたどり着いた」というBIS規制の逆説を指摘した東谷さんの最近の著作（

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⭐BIS規制の嘘(うそ)

⭐)と問題関心はシンクロします。著者の批判は金融工学という詐欺を「聖典」として教えているビジネススクールの教育内容にまで及んでいるほどです。ところでこの作品には１−２箇所しか数式が出てきません。

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⭐統計学的手法によるリスク量計測手法は使えるのか。金融機関のトレーディング部門やリスク管理部門に数学者が大挙して押し寄せ、数式や統計学を使ってプライシングやリスク量計測を行うことは役に立っているのか。日本人はリスク管理と呼びたがるが、過去の市場価格の変動に関するデータを用い、それが一定の確率分布―標準正規分布に従うと仮定し、99パーセンタイルの VaR を算出することは、リスク量計測でありリスク管理ではない。そして、その VaR には何の意味もない。壊れた計器を盲目的に信じて飛行機を操縦するよりも、自分の目で窓の外を見て、高度や飛行速度を（数字にできないかもしれないが）感覚的に感じながら操縦するほうがマシ。全然精度のないものが、何桁もの数字で示されるために、惑わされてしまう。常識をもっと使え。そういう当たり前のことを主張している本。読んでみて。

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