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Interesting. But why on earth is Black-Scholes equation on that list? It's not like Long-Term Capital Management took over the world with it. It's a fragile mod

by oskarth 13y ago

Interesting. But why on earth is Black-Scholes equation on that list? It's not like Long-Term Capital Management took over the world with it. It's a fragile model and does not deserve to be on the same list as these beautiful and useful ideas.

auvi 13y ago
Yeah I was also a bit surprised. LTCM's "Long-Term" was ~ 4 years (1994-1998) with a total loss around $4.6 Billion. That time seems to be very small compared to the ~ 2500 years of the list. And $4.6 Billion? It's not even one third of WhatsApp!
- deleted 13y ago
  [deleted]
- justincormack 13y ago
  LTCM was not the only outcome of it. Pretty much of all of modern finance is.
alienfluid 13y ago
These are equations that changed the world, for better or for worse. Black-Scholes opened up a whole world of asset pricing that much of the financial system today is based on. It can be argued that it did indeed have a deep effect on the state of the world through developments in modern finance.
xmonkee 13y ago
LTCM aren't the only ones to ever use Black-Scholes. It's used millions of times every day around the world as of today. Sure, the equation isn't very sophisticated, but it's the standard model for volatility based product pricing around the world. Volatility surfaces are sometimes back calculated from market prices using the Black-Scholes equation and then plugged into various more advanced models. But the vast majority of all derivative trades (at least in the equity and FX space) are still purely based on Black-Scholes.
dredmorbius 13y ago
"Changed the world" can be for better or worse. Much as TIME's "Man of the Year" doesn't (necessarily) go to the person who had the greatest impact for good (Stalin (twice), Hitler, Khrushchev, Nixon & Kissenger, Ayatullah Khomeini). The financial meltdowns of the mid 1990s and 2000s certainly had significant global impact, to the point of getting a lot of people to question what they thought they knew of economics. Fairly famously Alan Greenspan, who admitted that he was waylaid by the whole thing. I just happened across his recent book whose title is intruiging, though by reviews and what little of it I skimmed, the content is less than overwhelming: The Map and the Territory. I'd need to find the backstory on the title, but it is strongly reminiscent of Robert Pirsig's Lila, the opening chapter of which starts with the author navigating a river by what turns out to be the wrong chart. Confusion over our mental models and reality being a major risk factor to current affairs.
- md224 13y ago
  > I'd need to find the backstory on the title This might be of interest: http://en.wikipedia.org/wiki/Map-territory_relation http://en.wikipedia.org/wiki/Map-territory_relation
  - dredmorbius 13y ago
    Thank you, interesting.
kens 13y ago
Black-Scholes is relevant to any HN readers with stock options, but I agree that it doesn't belong on the list. And why isn't F=ma on the list? That seems really fundamental. (Maybe they didn't want Newton over-represented, but I'd pick that over gravitation.) And is Euler's Formula really important enough to be on the list? (genuine question) I'd put De Morgan's law on the list because of its importance to computers, but technically I guess it's not an equation.
- rayiner 13y ago
  You could lump it under #3, Calculus. Newton originally expressed using differential calculus as F = dp/dt, and developed his second law as an application of his newly-developed calculus.
  - NAFV_P 13y ago
    > Newton originally expressed using differential calculus as F = dp/dt, and developed his second law as an application of his newly-developed calculus. You used Leibnitz notation, Leibnitz kicked Newton's arse, and Newton was a complete arsehole.
    - ce4 13y ago
      Leibniz!
NAFV_P 13y ago
> It's a fragile model and does not deserve to be on the same list as these beautiful and useful ideas. I have a copy of the book at home, Ian Stewart is a very good populariser of maths. http://www.amazon.co.uk/Seventeen-Equations-that-Changed-World/dp/184668532X http://www.amazon.co.uk/Seventeen-Equations-that-Changed-Wor... You should take the title of the book literally, equations that changed the world (but not necessarily for the better).
mathattack 13y ago
The level of financial impact from that equation is enormous. It's not just LTCM. Every bank in the world now uses derivatives to hedge risk. Every mortgage is dependent on people being able to offload the risk. Saying Black-Scholes is imperfect is like saying Newtonian mechanics doesn't account for Relativity. Black-Scholes was the formal starting point for pricing derivatives, or the offloading of risk. Everyone has advanced well beyond it. Blowups not withstanding, without Black-Scholes our lives would be very different.
- oskarth 13y ago
  I would argue that it's generally a massive failure, and that history will view these models as extremely naive when it comes to judging risk. Comparing it to Newtonian mechanics is unfair. Newtonian mechanics actually work, just not for everything. To have a risk model that doesn't work for risk is something completely different.
  - mathattack 13y ago
    There are lots of reasons why Black-Sholes doesn't work. Also lots of reasons why incentive problems cause people to misuse financial models. But that doesn't change the reality that our lives are dramatically changed as a result of them.

by oskarth 13y ago

auvi 13y ago

Yeah I was also a bit surprised. LTCM's "Long-Term" was ~ 4 years (1994-1998) with a total loss around $4.6 Billion. That time seems to be very small compared to the ~ 2500 years of the list. And $4.6 Billion? It's not even one third of WhatsApp!

deleted 13y ago
[deleted]
justincormack 13y ago
LTCM was not the only outcome of it. Pretty much of all of modern finance is.

alienfluid 13y ago

These are equations that changed the world, for better or for worse. Black-Scholes opened up a whole world of asset pricing that much of the financial system today is based on. It can be argued that it did indeed have a deep effect on the state of the world through developments in modern finance.

xmonkee 13y ago

LTCM aren't the only ones to ever use Black-Scholes. It's used millions of times every day around the world as of today. Sure, the equation isn't very sophisticated, but it's the standard model for volatility based product pricing around the world. Volatility surfaces are sometimes back calculated from market prices using the Black-Scholes equation and then plugged into various more advanced models. But the vast majority of all derivative trades (at least in the equity and FX space) are still purely based on Black-Scholes.

dredmorbius 13y ago

"Changed the world" can be for better or worse. Much as TIME's "Man of the Year" doesn't (necessarily) go to the person who had the greatest impact for good (Stalin (twice), Hitler, Khrushchev, Nixon & Kissenger, Ayatullah Khomeini). The financial meltdowns of the mid 1990s and 2000s certainly had significant global impact, to the point of getting a lot of people to question what they thought they knew of economics. Fairly famously Alan Greenspan, who admitted that he was waylaid by the whole thing. I just happened across his recent book whose title is intruiging, though by reviews and what little of it I skimmed, the content is less than overwhelming: The Map and the Territory. I'd need to find the backstory on the title, but it is strongly reminiscent of Robert Pirsig's Lila, the opening chapter of which starts with the author navigating a river by what turns out to be the wrong chart. Confusion over our mental models and reality being a major risk factor to current affairs.

md224 13y ago
> I'd need to find the backstory on the title This might be of interest: http://en.wikipedia.org/wiki/Map-territory_relation http://en.wikipedia.org/wiki/Map-territory_relation
- dredmorbius 13y ago
  Thank you, interesting.

kens 13y ago

Black-Scholes is relevant to any HN readers with stock options, but I agree that it doesn't belong on the list. And why isn't F=ma on the list? That seems really fundamental. (Maybe they didn't want Newton over-represented, but I'd pick that over gravitation.) And is Euler's Formula really important enough to be on the list? (genuine question) I'd put De Morgan's law on the list because of its importance to computers, but technically I guess it's not an equation.

rayiner 13y ago
You could lump it under #3, Calculus. Newton originally expressed using differential calculus as F = dp/dt, and developed his second law as an application of his newly-developed calculus.
- NAFV_P 13y ago
  > Newton originally expressed using differential calculus as F = dp/dt, and developed his second law as an application of his newly-developed calculus. You used Leibnitz notation, Leibnitz kicked Newton's arse, and Newton was a complete arsehole.
  - ce4 13y ago
    Leibniz!

NAFV_P 13y ago

> It's a fragile model and does not deserve to be on the same list as these beautiful and useful ideas. I have a copy of the book at home, Ian Stewart is a very good populariser of maths. http://www.amazon.co.uk/Seventeen-Equations-that-Changed-World/dp/184668532X http://www.amazon.co.uk/Seventeen-Equations-that-Changed-Wor... You should take the title of the book literally, equations that changed the world (but not necessarily for the better).

mathattack 13y ago

The level of financial impact from that equation is enormous. It's not just LTCM. Every bank in the world now uses derivatives to hedge risk. Every mortgage is dependent on people being able to offload the risk. Saying Black-Scholes is imperfect is like saying Newtonian mechanics doesn't account for Relativity. Black-Scholes was the formal starting point for pricing derivatives, or the offloading of risk. Everyone has advanced well beyond it. Blowups not withstanding, without Black-Scholes our lives would be very different.

oskarth 13y ago
I would argue that it's generally a massive failure, and that history will view these models as extremely naive when it comes to judging risk. Comparing it to Newtonian mechanics is unfair. Newtonian mechanics actually work, just not for everything. To have a risk model that doesn't work for risk is something completely different.
- mathattack 13y ago
  There are lots of reasons why Black-Sholes doesn't work. Also lots of reasons why incentive problems cause people to misuse financial models. But that doesn't change the reality that our lives are dramatically changed as a result of them.