They also ignored the following

You can't model human behaviour (in the same scientific/mathematical way you can with so-called "fair" arbitrage free instrument pricing)

You can't respond to speculation going completely against you by following the same flawed model(s) more rigorously (or by leveraging up even more!)

Markets are NOT always rational (to assume so, it's pretty f'ing stupid really)

And they are certainly NOT normally distributed (black swans etc show how key tails are and how the unthinkable can wipe you out)

Personally they placed far too much reliance on theoretical models in my opinion, because that's the type of traders/academics they were.

I was just saying I've studied it in the past (along with other financial maths/economics etc) so it's not completely alien to me.

The key to becoming successful at anything involves a HELL of a lot of practice, something these keys, Merton, Black, Scholes etc probably failed to appreciate, hence the over-reliance on their models.

If any trader is not prepared for the s**t to hit the fan, they shouldn't be anywhere near securities of any sort in my opinion

But still funny (the LTCM story!) hehe

Posted By: essexcanaryOTBC on July 22nd 2013 at 14:18:11

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