BBC Focus Magazine

[M Paul Lloyd]

I have always said that you can theorise almost anything with maths and by default prove nothing in the process....

Black-Scholes: The maths formula linked to the financial crash

By Tim Harford BBC Radio 4, More or Less
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.
Black-Scholes was first written down in the early 1970s but its story starts earlier than that, in the Dojima Rice Exchange in 17th Century Japan where futures contracts were written for rice traders. A simple futures contract says that I will agree to buy rice from you in one year's time, at a price that we agree right now.
By the 20th Century the Chicago Board of Trade was providing a marketplace for traders to deal not only in futures but in options contracts. An example of an option is a contract where we agree that I can buy rice from you at any time over the next year, at a price that we agree right now - but I don't have to if I don't want to.
You can imagine why this kind of contract might be useful. If I am running a big chain of hamburger restaurants, but I don't know how much beef I'll need to buy next year, and I am nervous that the price of beef might rise, well - all I need is to buy some options on beef.
But then that leads to a very ticklish problem. How much should I be paying for those beef options? What are they worth? And that's where this world-changing equation, the Black-Scholes formula, can help.

More here
http://www.bbc.co.uk/news/magazine-17866646

[Shadowwolf]

I doubt it helped but I think it's a much smaller part than incompetence, de-regulation and naked greed played.

[M Paul Lloyd]

I rather suspect that the incompetant and greedy are desperatley looking for something............... anything else to point the finger of blame at.

I do however feel that we are perhaps placing a little too much faith in complex mathematical models ?

[Shadowwolf]

I rather suspect that the incompetant and greedy are desperatley looking for something...

That's what sprang to mind when I saw this, it wasn't us it was those damn book learners!

I do however feel that we are perhaps placing a little too much faith in complex mathematical models ?

In certain places possibly, certainly in such an open system like finance that thanks to the human element means nothing is ever guaranteed.

[M Paul Lloyd]

Yes the human element.
As a bit of an aside many years ago I was party to planning an emergency evactuation plan for a large building complex and we were shown short film clips of crowd prediction models, mostly consisting of ball bearings going down a sloping maze, but the lecturer made much of how 'this would all be done by computer one day' but what we found in pratice, with real humans and I was one of them, was the odd individuals who would, for no perticular reason, go the wrong way!?