Pricing the Future: Finance, Physics, and the 300-Year Journey to the Black-Scholes Equation: A Story of Genius and Discovery

Pricing the Future: Finance, Physics, and the 300-Year Journey to the Black-Scholes Equation: A Story of Genius and Discovery

Pricing the Future: Finance, Physics, and the 300-Year Journey to the Black-Scholes Equation: A Story of Genius and Discovery

Pricing the Future: Finance, Physics, and the 300-Year Journey to the Black-Scholes Equation: A Story of Genius and Discovery

Synopsis

Options have been traded for hundreds of years, but investment decisions were based on gut feelings until the Nobel Prize-winning discovery of the Black-Scholes options pricing model in 1973 ushered in the era of the "quants." Wall Street would never be the same. In 'Pricing the Future', financial economist George G. Szpiro tells the fascinating stories of the pioneers of mathematical finance who conducted the search for the elusive options pricing formula. From the broker's assistant who published the first mathematical explanation of financial markets to Albert Einstein and other scientists who looked for a way to explain the movement of atoms and molecules, 'Pricing the Future' retraces the historical and intellectual developments that ultimately led to the widespread use of mathematical models to drive investment strategies on Wall Street.

Excerpt

Options have been traded for hundreds of years, at least since the sixteenth century, when they were used to buy and sell commodities in Antwerp and Amsterdam. But nobody knew what the true value of an option really was. For centuries, their prices were determined by supply and demand, with investors estimating their value on the basis of gut feelings. Indeed, it was not even known what determines the value of an option, whether the current price of the underlying stock, commodity, or asset, the rate of interest, investors’ attitudes toward risk, the time remaining until expiration of the option, and so on. However, options do have a mathematically precise value. the equation that gives the correct price was found by financial economists Fischer Black, Myron Scholes, and Robert Merton in 1973. Their discovery was considered a singular achievement, comparable to Newton’s discovery of the laws of motion. Scholes and Merton were awarded the Nobel Prize in 1997. (Fischer Black had died two years earlier, at the age of 57.) However, disaster followed the Nobel Prize. the spectacular near bankruptcy of Long-Term Capital Management, the billion-dollar company that Scholes and Merton had helped found, proved that high academic achievements do not guarantee financial success.

Spanning the period from the middle of the seventeenth century until nearly today, this book traces the historical and intellectual developments that led to the options pricing formula. It describes the search for the elusive equation but emphasizes the personalities behind that search. Some of the people who appear are medical doctor Robert Brown (of Brownian motion fame), three French accountants and stockbrokers (Jules Regnault . . .

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