There's Enough Math in Finance Already. What's Missing is Imagination.

in some sense all of finance is about imagination because finance is about saying what should something be worth today based on what I think is going to happen in the future nobody knows what's going to happen in the future and so all financial models are specifying in some way an imagined future and then saying if that future is true what should I pay for something today and so for example um if you're if you're building an optional model you're saying what will volatility be in the future and given my estimate of volatility in the future I can value an option today if you're looking at CDOs which sort of came a cropper in the Bigham financial crisis essentially human beings are saying what will housing prices do in the future what will defaults and loans be in defaults and mortgages B and given my imagined scenario for the future what should I pay for something today that's sensitive to that future behavior the big failures I think or failures of imagination not of mathematics the big mistakes are when you don't think of something that does come to fruition eventually when I was in graduate school I went to see a movie the night before my qualifying exams called bedazzled with Peter Cook and Dudley Moore it's about 40 years old but I think it was remade a few years ago Dudley Moore I think they're both dead now Darla Moore and Peter Cook he was a short-order cook and a Wimpy's in London and he's in love with the waitress that serves him Peter Cook plays the devil and offers him seven chances to seduce the waitress in exchange for his soul and so he agrees and then he tries to specify the circumstances under which he will be with the waitress and so the first time he says something like he'd like to be in a fancy castle in Oxfordshire and with her and both of them in love with each other and both of them wealthy and the devil snaps his fingers and there they are in this case on their around a billiard table and they're in love with each other but she's married to the owner of the castle and he's just a guest and she has scruples so she's not willing to get involved with him and every scenario he tries of these seven scenarios and he gets wrong in the last one he asks if they can both just be somewhere quiet with nobody to interfere with them and nobody talking and they make them both of them nuns in a sort of Trappist monastery and so his imagination can never specify precisely enough the future that that he'd like to have and I think that's sort of what goes wrong with a lot of financial models you can't really write down one short description of all the things that markets may do in the future

Channel: Big Think

Views: 36,591

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Keywords: bigthink, Elizabeth Rodd, jonathan fowler, 5mins, Big Think, BigThink, BigThink.com

Id: qTBH5sJYnn4

Length: 2min 25sec (145 seconds)

Published: Tue Nov 08 2011