lol, let me take a wild guess. You read some quant writeup by Goldman and lost your whole 5k USD account as a result. Or you are a second year MBA and just sat your first options class and now believe you are qualified to interpret history. I think its better to read up on some quality treatises rather than pissing around and trying to look smart which you clearly dont...just my 2 cents...
"July 8 (Bloomberg) -- John Meriwether, who roiled global markets when Long-Term Capital Management LP collapsed in 1998, plans to shut his current hedge fund, according to a person familiar with the matter. JWM Partners LLC is closing its main Relative Value Opportunity II fund after losing 44 percent from September 2007 to February 2009. Meriwether, credited with generating billions of dollars of revenue at the former Salomon Brothers in the 1980s through so-called relative value trades, returned an average of 1.46 percent a year with his new fund since opening in 1999, compared with 2.4 percent for the Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index. " John Meriwether, not a quant, almost killed the global economy in 1998, by getting Nobel laureate quants to do what he wanted them to do. He now plans to shut down his current hedge fund, which returned a remarkable 1.46% per year.
You seem to have a habit of trying to put words into my mouth. Options have been around for years, long before Black Scholes. at no point did I say they havent. Right now, we still have a vibrant options market in which Black Scholes does not dictate the option prices. Perhaps you can show where I said that options were not traded before 1987. I do agree with your definition of portfolio insurance 100%: "A strategy of hedging a stock portfolio against market risk by selling stock index futures short or buying stock index put options." What a shame this wasn't the reality in 1987: http://www.fool.com/Features/1997/sp971017CrashAnniversaryFlawedInsurance.htm I have no axe to grind here. I just subscribe to the opinions of Taleb, Triana and the like. The market can price options better than any computer model and certainly the probability estimates of outlying events in the most widely used quantitative models has been show severely lacking.
You misread my comment. It's not your choice. By 'you' I was referring to the risk manager/trader that chooses to believe blindly in numbers that are given to him by whatever system he uses. The point that you keep making is misguided. All you're saying is that if everyone simultaneously subscribes to the same model, whether it's CPPI, gaussian copula or whatever else, the world goes to hell when the underlying assumptions are violated (e.g. liquidity disappears, etc). Well, DUH! You completely fail to see two very simple points: a) the issue you describe is not about quant models, but rather about humans (recall the tulip mania and the South Seas Co; no quant models there); b) it's not the failure of the model, but a failure of incentives that cause 'herding', which exacerbates the boom and bust. EDIT: As I keep saying, time and again, I'd go with Fisher Black over Taleb any day. Taleb has nothing constructive to say, while Mssrs Black & Scholes, regardless of whether right or wrong, have increased our understanding of the world immensely.
Of course, if we're talking about people like David X. Li, I'm with the skeptics. http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=1
Nope - I run a software company, we produce programming languages, forecasting models and simulations for planning purposes. I'm at home today as it's a slow day so I thought I'd annoy some people on line with my opinions of my peers in the financial world I promise I'll stop when the markets open - US markets that is - still 6 hours to go...
Nope - I don't disagree with any of that. I agree with all of it except the part about complicity. When Moodys rated a derivative AAA, I don't think the buyers of the derivatives understood the risks they were taking, although I may be wrong.
I'm sorry, but I think you have to do a little better than that. Everything is about psychology. This is just another commonplace statement, which can be applied to any area of life. Quite frankly, I don't see what your point is.
Of course they didn't... 'Cause guess what was going through their heads? It wasn't the gaussian copula and its flaws. What I'd like to understand is at which point in the whole toxic CDO chain you absolve the actual decision-makers of the responsibility for their decisions and start suggesting that they're just innocent victims of the evil quants with their models. EDIT: That Wired article about David Li is not a very good one...