The World Accroding to Robert Merton

michael michael at
Thu Jul 9 08:06:33 PDT 1998

Here are some notes I took from the Scientific American:

Stix, Gary. 1998. "A Calculus of Risk." Scientific American, 278: 5 (May): pp. 92-7. 92: He quotes Emanuel Derman, head of the quantitative strategies group at Goldman Sachs, a physicist-turned-quant, explained why says that finance differs from physics: No, mathematical model can capture the it multitude of ever mutating economic an factors that cause major market perturbations. "In physics, you're playing against God; in finance, you're playing against 25 people."

96: "Problems related to modeling have accounted for about 20 percent of the $23.77 billion in derivatives losses that have occurred during the past decade, according to Capital Market Risk Advisors. Last year, however, model risk comprised nearly 40 percent of the $2.65 billion in money lost. The tally for 1997 included National Westminster Bank, with $123 million in losses, and Union Bank of Switzerland, with a $240-million hit."

97: "As models become more complicated, people will use them, and they're dangerous in that regard, because they'll use them in ways that are deleterious to their economic health," said Stanley R. Jonas, who heads the derivatives trading department for Societe Generale/FIMAT in New York City.

97: An unpublished study by Jens Carsten Jackwerth of the Lonon Business School and Mark E. Rubinstein of the University of California at Berkeley has shown that traders' own rules of thumb about inferring future stock index volatility did better than many of the major modeling methods."

-- Michael Perelman Economics Department California State University Chico, CA 95929

Tel. 530-898-5321 E-Mail michael at

More information about the lbo-talk mailing list