Description: In 1973, three brilliant economists, Fisher Black, Myron Scholes and Robert Merton, discovered a mathematical breakthrough that revolutionized modern finance. The elegant formula they unleashed upon the world was sparse and deceptively simple, yet it led to the creation of a mulit-trillion dollar industry. Their bold ideas earned them a Nobel Prize and attracted the elite of Wall Street.
In 1993, Scholes and Merton joined forces with John Merriweather, the legendary bond trader of Salomon Brothers. With 13 other partners, they launched a new hedge fund, Long Term Capital Management, that promised to use mathematical models to make investors tremendous amounts of money with little risk. Their money machines reaped fantastic profit, until their theories collided with reality, sending them spiraling out of control. This crisis threatened to bring markets around the world to the brink of callapse.
Join NOVA in the quest to turn finance into a science. Plus, trace the little-known history of predicting financial markets and go to work with some successful modern traders who rely on intuition, as well as on mathematical models.
TDB, the best video on investing ever!! This is the most engaging and informative video on the subject of trading and speculation that exists. As Jesse Livermore stated, Speculation is as old as the hills. This video captures many of the aspects of speculation and shows that the same pitfalls that small individual investors get tripped up on are the same ones that multi-billion dollar hedge funds get tripped up on. Human nature is the same at all levels. Controlling human nature creates extraordinary returns.
Nice Very nice video! Tells the story of LTCM. It's not a deep documentary...they don't tell the details of operations LTCM did. They only tell about the mathematic formula that they got to manage the fund.
Biased but interesting This program attempts to give an overview of the history and investment strategies of Long Term Capital Management, an investment firm and hedge fund that began in the mid nineties and was finally closed in 1999. The program is both interesting and informative, for it not only educates the viewer in some of the history behind quantitative finance and options trading, but it also illustrates current attitudes about mathematical modeling in finance. Quantitative finance is still a huge part of institutional investing, but there are still those traders who feel that it is used too much, and a certain amount of hostility exists between the "rocket scientists" or "quants" and the "intuitive" traders who depend only minimally on mathematics. What is interesting about this tension is that no one has really conducted a study that would shed light on which approach is more optimal in terms of making money for either individual investors or financial institutions. Such a study would be fascinating, and would give valuable information on trading strategies.
The viewer will learn of the attempts to find a mathematical formula for risk, which after some decades of research was finally arrived at by Myron Scholes and Fisher Black, with important contributions from Robert Merton. The `Black-Scholes equation' is now ubiquitous in financial engineering, and as the program mentions, is used millions of times a day in trading pits to estimate the price of an option. This part of the program is actually very interesting, for it discusses the historical origins of quantitative finance, one of these being the thesis of Louis Bechalier. His thesis, entitled "The Theory of Speculation", is described as being the first complete mathematical model of stock market fluctuations and one that discussed the use of options to control risk. The contributions of Bechalier were ignored for many decades unfortunately, giving another example of the extreme bias in academia.
Many of the conclusions drawn in this program are suspect. For example, it is not known what factors really caused LTCM to go into liquidation. The viewer is also led to believe that the LTCM organization, through its vast positioning, aggravated the financial turmoil at that time. No evidence for this is given in the program, and many of the guests reflect a certain bias against quantitative finance. For example, one of the guests on the program, Stan Jonas of FINAT Brothers, refers to a collection of people who one would want to "manage their money." But who are these people and what justifies imputing to them this rare ability? What is their track record in investment? Do they consistently make money, and is this consistency verifiable to an external observer? Jonas does not give any names or examples unfortunately, and his statements do reflect to a certain degree a bias against mathematical modeling in finance. Such a bias in and of itself is not necessarily bad, but a reader who is really interested in studying the difference in efficacies between trading strategies, i.e. maybe between those that exploit complex mathematics and those that do not, will not gain anything from Jonas' statements.
And then there is also Leo Melamed, the "intuitive trader" who is described by the narrator as being "business savvy" and being the founder of the financial futures markets. Melamed makes the somewhat outlandish statement that "academics make terrible traders," but he offers no evidence that this is true. Has he conducted an historical study where a collection of academics and a collection of "intuitive traders" engaged in financial trading and the results compared? No, he has not, and his statement reflects the tension that still exists between those who favor quantitative approaches to trading, and those who trade "from the gut."
In the program Myron Scholes expressed the opinion that it is an open question whether the models they used exacerbated the financial turmoil at the time or indeed whether the instabilities of the financial markets were a cause of flaws in the mathematical models used. He is certainly correct in his opinion, and to this day there have been no serious and objective studies of the LTCM debacle. What really caused it, and what kinds of actions should be taken in the future if a similar series of events happens again? Financial modeling is of course still being done actively in all major financial institutions at the present time. Simulation modeling, using Monte Carlo techniques are one of the more standard approaches used to price options. But there are other techniques using highly advanced artificial intelligence that being deployed also. The field of quantitative finance is thus a thriving one, despite the skepticism expressed by some traders, reinforced as it is by the statements of this program. It remains to be seen whether trading based on financial engineering is always advantageous over trading based on more `intuitive' approaches. There is no doubt though that the behavior of the financial markets of the twenty-first century will be totally different than what has been observed before. This behavior will arise both because of the nature of the financial instruments used and because of the specific models used to study them.
"Mathematics does not drive financial markets. People do." Telling the story of Long Term Capital Management and the mathematical formula underlying its investment strategy, this NOVA special traces the development of the formula which helped to create a multi-trillion dollar industry--and its 1997 meltdown, which threatened markets around the world. In a clear presentation geared for an audience of interested novices, non-mathematicians, and financial wizards alike, NOVA explains the search for a formula which could solve the problem of risk and return in the stock market and turn financial investment into a science.
Economist Paul Samuelson in the 1950s first discovered the turn of the century work of Bachelier, a French graduate student, who posited that the development of options could protect investments against stock fluctuations. In the 1960s, Myron Scholes, Fisher Black, and Robert Merton further investigated the subject of options in an effort to discover how one could take only the upside and not the downside of options and how one might calculate the correct price of an option at any moment in time by knowing the current price of the stock. By devising a system of "dynamic hedging," they believed that they could eliminate uncertainty of movements and neutralize risk by spreading risks across individuals, financial markets, and through time. Scholes and Merton won the Nobel Prize for this pioneering work in economics, Black having died the year before the award.
When traders actually began to use this formula in financial markets, Scholes and Merton joined John Meriwether of Salomon Brothers to set up Long Term Capital Management, a company which was wildly successful until mid-1997, when two unforeseen, but ultimately crucial, events occurred--property prices plummeted in Thailand, and Russia reneged on its debt payment. LTCM continued to hedge its global investments, even as markets continued to diverge. Since LTCM stood to lose an astronomical $1.25 trillion if it collapsed, the Federal Reserve stepped in to prevent a global economic catastrophe.
Extensive interviews with Myron Scholes, Robert Merton, traders on the Chicago Board of Trade, Alan Greenspan, and others make this story come alive, offering cautionary notes about the continued use of models when unprecedented events, not included in such models, can have such profound effects on the world economy. Fascinating and thought-provoking for even the neophyte investor, this production illuminates the dictum that "Mathematics does not drive financial markets. People do." Mary Whipple
Trillion Dollar Bet This is really a great video. If you have a passion for finance, you do have to watch it. It's an excellent opportunity to see the smartest people in the world of derivatives both "practitioners" and academics from top Universities. It is very clear and easy to understand even for those who have just entered the world of derivative evaluation using Black, Scholes and Merton formula. The opinions of all the protagonists are really inspiring and will give you a real feeling of this world, where advanced math, economics and practice are all melted together.
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