The Math Formula That Lead To the Financial Crash

New submitter jools33 writes "The BBC has a fascinating story about how a mathematical formula revolutionized the world of finance — and ultimately could have been responsible for its downfall. The Black-Scholes mathematical model, introduced in the '70s, opened up the world of options, futures, and derivatives trading in a way that nothing before or since has accomplished. Its phenomenal success and widespread adoption lead to Myron Scholes winning a Nobel prize in economics. Yet the widespread adoption of the model may have been responsible for the financial crisis of the past few years. It's interesting to ponder how algorithms and formulas that we work on today could fundamentally influence humanity's future."

Comments

Re:Don't blame math

[Anonymous Coward]

Yeah, here I was thinking it was because banks lent lots of money to people and countries who couldn't afford it, then acted surprised when they didn't get it back again. Not it turns out it was Math all along. Damn you, Math!

Re:economics ?

[polar red]

So that makes it fake-Nobel in pseudo-science.

Not too complex for a musical

[Antique Geekmeister]

I highly recommend the opera at http://www.youtube.com/watch?v=JhEH00rlmz8, from the Ig Nobel prizes a few years ago. It captured the most recent banking crisis rather well, and without the need to blame human greed on misused mathematical formula.

Supply and Demand

[Guppy]

Once Risk became a commodity capable of being bought and sold, it was only a matter of time before market responded by producing more Risk.

Re:Not economics; theft.

[BronsCon]

So, you're saying it was the bankers' black souls, and not their Black-Scholes, that caused all of this?