The Blank Swan: The End of Probability [Hardcover]

Elie Ayache (Author)

Book Description

Publication Date: May 25, 2010

October 19th 1987 was a day of huge change for the global finance industry.  On this day the stock market crashed, the Nobel Prize winning Black-Scholes formula failed and volatility smiles were born, and on this day Elie Ayache began his career, on the trading floor of the French Futures and Options Exchange.  
 
Experts everywhere sought to find a model for this event, and ways to simulate it in order to avoid a recurrence in the future, but the one thing that struck Elie that day was the belief that what actually happened on 19th October 1987 is simply non reproducible outside 19th October 1987 - you cannot reduce it to a chain of causes and effects, or even to a random generator, that can then be reproduced or represented in a theoretical framework.

The Blank Swan is Elie's highly original treatise on the financial markets - presenting a totally revolutionary rethinking of derivative pricing and technology. It is not a diatribe against Nassim Taleb's The Black Swan, but criticises the whole background or framework of predictable and unpredictable events - white and black swans alike -, i.e. the very category of prediction.
 
In this revolutionary book, Elie redefines the components of the technology needed to price and trade derivatives. Most importantly, and drawing on a long tradition of philosophy of the event, from Henri Bergson, to Gilles Deleuze, to Alain Badiou, and on a recent brand of philosophy of contingency, embodied by the speculative materialism of Quentin Meillassoux, Elie redefines the market itself against the common perceptions of orthodox financial theory, general equilibrium theory and the sociology of finance.
 
This book will change the way that we think about derivatives and approach the market. If anything, derivatives should be renamed contingent claims, where contingency is now absolute and no longer derivative, and the market is just its medium. Also, the book establishes the missing link between quantitative modelling (no longer dependent on probability theory but on a novel brand of mathematics which Elie calls the mathematics of price) and the reality of the market.

Editorial Reviews

From the Author

The current crisis has led us to a conceptual impasse regarding the financial market. No prediction model can apply to the market, someone like Nassim Taleb, author of The Black Swan, would say and derivatives, which are the product of the most sophisticated brand of financial mathematics and engineering, should be banned. I claim that the way of the market falls outside probability and prediction, and for this reason it should be preserved.

Probability has to be discarded and a new category has to emerge instead, which will mediate contingency. This new category is something called "price." While probability mediates abstract possibilities, or pure metaphysical fictions, price mediates concrete and real contingencies, which typically take place in a market.

Philosophers and financial academics alike seem to be missing the point. Philosophers of contingency and the event are for the most part of leftist obedience. They believe that the crisis signals the end of capitalism and Wall Street.

In fact, the market has nothing to do with Wall Street or with the investment banks. Market-making is a creative activity. The market is a category of thought that is independent of ideology. It replaces probability altogether and discarding the market, like the philosophers of the radical change claim we should do, is like discarding probability!

As for financial academics, they aren't in the least interested in learning about the onto-genesis of the market, or the very investigation that I have attempted in this book. They deal with prices and values as if they were numbers and mathematical functions. How can they listen to someone who claims that the price only looks like a number but doesn't "compute" like one and that one needs to very carefully  examine a long thread of philosophy of the event and of contingency, extending  from Bergson to Deleuze to Badiou and Meillassoux, in order to understand what's inside a price ?

* * * * *

Simplest ideas are sometimes the most revolutionary and, consequently, the most difficult ones. Here is the simple idea that my whole book revolves around: If contingency is truly to be considered absolute (as in Meillassoux), then it should no longer be thought in terms of possibilities (what, in probability theory, we call "states of the world," or in metaphysics, "possible worlds"). It should be thought absolutely, independently of any "system of coordinates" represented in possibility.

In Meillassoux, contingency comes even before existence, before the ontology of existing things, let alone states. I find astonishing that no one seems to be worried about the medium where such contingency-without-possibility, if it must be conceived at all, could be "represented." Not to mention the metaphysics, or even the mathematics, where it could find an expression.

It is very hard to think of a contingent thing without representing in mind the possible other things that it might be. Philosophers are trained to form and develop just these kinds of "impossible" thoughts. All I am saying is that - with all due respect to the philosophers - this conception of absolute contingency finally finds in the  market of contingent claims (and in its translation in the "mathematics of price")  the adapted category of thought.

My point is simply that philosophers might be missing a whole new way of writing philosophy. Just think what the real amazing implications would be if we were truly to start writing and thinking without the idea of probability and prediction! As for the financial and economical experts, they might be missing the opportunity to elevate their field above the level of human or political science. --Book synopsis

From the Inside Flap

"The Blank Swan is neither Black, White or Blank, but a very original book written about derivatives and financial markets. It will certainly make you think about derivatives instruments and markets in many new ways."
–Dr Espen Gaarder Haug, Trader, Thinker and Author of Derivatives Models on Models

"Ayache's writing is a very interesting combination of the completely mad and the entirely sane, with the non-crazy just neatly outweighing the insane."
–Dr Nina Power, Senior Lecturer in Philosphy at Roehampton University, co-editor of Alain Badiou's On Beckett (Clinamen) and author of One-Dimensional Woman (Zero Books).

See all Editorial Reviews

Product Details

• Hardcover: 496 pages
• Publisher: Wiley; 1 edition (May 25, 2010)
• Language: English
• ISBN-10: 0470725222
• ISBN-13: 978-0470725221
• Product Dimensions: 9.6 x 6.6 x 1.5 inches
• Shipping Weight: 2.1 pounds (View shipping rates and policies)
• Average Customer Review: 3.3 out of 5 stars  See all reviews (21 customer reviews)
• Amazon Best Sellers Rank: #243,488 in Books (See Top 100 in Books)

More About the Author

Elie Ayache was born in Lebanon in 1966. Trained as an engineer at l'École Polytechnique of Paris, he pursued a career of option market-maker on the floor of MATIF (1987-1990) and LIFFE (1990-1995). He then turned to the philosophy of probability (DEA at la Sorbonne) and to derivative pricing, and co-founded ITO 33, a financial software company, in 1999. Today, ITO 33 is the leading specialist in the pricing of convertible bonds, in the equity-tocredit problem, and more generally, in the calibration and recalibration of volatility surfaces. Elie has published many articles in the philosophy of contingent claims, as well as a book, dedicated to the philosophy of writing.

Customer Reviews

Most Helpful Customer Reviews

14 of 19 people found the following review helpful:

1.0 out of 5 stars There are better ways to waste your money ..., September 23, 2010

By 

Gianantonio Bissaro - See all my reviews

This review is from: The Blank Swan: The End of Probability (Hardcover)

This book it's a joke. It's written in a pseudo-philosophical jargon that completely obscures the poverty of ideas it conveys and that for the most part are bad rumination of other books. As an example of the voidness of this book please read the ridiculous section in which he tries to summarize a Tintin comics (Vol 714 pour Sydney).
If you are a philosopher and desire a good philosophy book read "Sein und Zeit" by Heidegger; if you are a quant and want something new have a look at "Path integrals in quantum mechanics and financial markets" by Kleinert; if you are an investor take "Security analysis, 2nd Edition" by Graham and Dodd; if you are trader maybe you'll find more useful to re-read the "Truth of the stock tape" by Gann. But if you like comics read Hergè by yourself.
The author wrote in some blog that his "ideas" are so advanced that it will take years for people to understand them (I quote literally: "I don't expect my writings to make sense to you immediately; they probably won't before a few years"). He is clearly a modest guy.
I think that all clever readers have already realized what is here to be understood. Nothing, unfortunately.

2 of 2 people found the following review helpful:

5.0 out of 5 stars Absolute Contingency, August 30, 2011

By 

Caleb Romo - See all my reviews

Amazon Verified Purchase

This review is from: The Blank Swan: The End of Probability (Hardcover)

Before I write my review, know that I'm not some tenured professor of postmodern/continental philosophy or sipper of ultra-super-duper, non-fat, double-soy-mocha cappi-latte thingies in some Parisian cafe with other quasi-intellectuals. I'm a shockingly lazy 20-year-old full-time student (Spanish and Arabic major) who works two hourly-wage jobs and spends waaaay too much of his very limited supply of money on books. Everyone complaining about the difficulty of this book merely didn't give the patience the book deserves. I'll try to help these childish "mature grown-ups" a bit.

After a very odd sequence of events, a sequence of "Black Swan" events in my life, I was lead to Taleb's 'The Black Swan: The Impact of the Highly Improbable.' I loved it. I read Taleb's other two non-technical books. Loved them. I'm a HUGE fan of Taleb. The dude's my hero in more than one context, and having met plenty of celebrities and Rock stars, all of them boring and none worth my time, Taleb is one of the few "celebrities" I would actually gush over if I met him. Having said that, when I found Ayache's book, I flipped out, probably squealed like a little girl, and immediately ran home and started reading. Oh. My. God. Hard reading, but holy shiznit this book is awesome.

The book's writing style is a bit difficult before you know how to read it, I admit, but having since had little chats with the author, I find the language is unavoidable. To help you out a bit, here are a few inadequate translations of terms:

"Debt" = Belief in possibility, being bound to the past. Also goes by "ruins" and other names in the book, depending on which of the four parts of the book you're reading. I suggest reading Part 4 first.

"Equity" = Mediation of contingency, looking to the future. Also goes by (sort of) "writing," among other names. Equity and writing aren't necessarily synonyms, but until you see how they're used in the book, you can treat them similarly (due to their relationship) until you discover their relationship's dynamics.

"Conversion" = Going from debt to equity, from looking to the past to writing the future. The point of this book is the conversion.

"The market" = Loosely speaking, it means "reality," or perhaps our way of perceiving it. This is the hardest term to simplify or "translate," but how it's used in context of the book makes the term easy to understand.

"Price" = Again, loosely speaking, let's call it "effect of contingency on 'the market'." Let's call it the impact of the Black Swan event, for simplicity's sake.

These are only a few of the book's terms, but the ones used the most. My overly simple translations are only to help those get started, and giving more adequate explanations would require me to write the entire BLANK Swan in this review, like Pierre Menard wrote the Quixote, right? The fact that I have to even (inadequately) simplify those terms is sad.

Okay, so imagine some Black Swan event happens, the Black Swan being some context-changing event. The Black Swan causes us to panic, searching for the new context, the new way to understand reality and our role in it. Let's look at the market (the market-market, not Ayache's "the market" yet). The very job of the market-maker, the writer of options, is to be shoved into the correct (market-related) context by that event, by contingency. When something happens, he has to evaluate and reevaluate the prices of new options, a process that absolutely must be founded on the writing/publishing of "exotic" option prices, those of an order of complexity above the simple "vanilla" options whose prices he's trying to find. Basically, he has to write/create/publish the price of a not-yet-traded complicated option in order to find the correct price of the simpler option. So, in the crazy, "unexpected," high-impact event, the market-maker's writing is what shoves him into the right context, instead of running around like a chicken with his head cut off like everyone else does. Now look at this process in a broader philosophical context, and you'll start to get this book. This explanation is WAY simplified and therefore inadequate and unfaithful to the book, but if you understand this paragraph to some extent, then you can enjoy this book.

The true genius of the book really hits you at the end, when Ayache explains that the market-maker's role, and you see that the whole book, the whole of 'The BLANK Swan: The End of Probability' IS the writing of the "exotic," the more complex. Let's call Taleb's 'The Black Swan' a Black Swan event, the ideas presented being the simple vanilla options needing a price. Ayache's 'The BLANK Swan' is the publishing of the more complex, not-yet-"traded" exotic options, the foundation against which we build this whole edifice of mediating contingency. THE BOOK IS AN EXAMPLE OF WHAT THE BOOK IS ABOUT. It's really, really quite clever. Like. Really clever. Really.

Now, I'm purty smart, sure. And my life's pretty good, being that I had the time to give this book some patience. I know three or so languages; I have two steady sources of income, my own health insurance; I know plenty about plenty in subjects like philosophy, linguistics, psychology, economics and markets, medicine, mathematics, even quantum physics; I play a few musical instruments; I have zero debt; pay my own bills (-I'm in college, so this is kinda impressive); got a cool car (GK Tiburon -very proud); I have no specialty in skill or knowledge, and I'm very comfortable in time and (mostly so in) finances (at least, for an easily bored college student). I had no experience in abstract postmodern/continental philosophy, Deleuze or Hegel or Massui or whoever, but I still got this book. To those who opened this book, got confused, and wrote that it's the author's fault, are you REALLY going to accept that you're dumber than a 20-year-old smart/\$$ who works two crappy hourly-wage jobs and drives an 8-year-old Hyundai? Of course not, so go pick up the book and BE PATIENT. Geez. The reviews of this book drive me nuts. It's like reading complaints dictated by toddlers.

I wrote his at Ayache's request; he wanted someone who had the patience to understand the book help drown out the noise of impatient toddlers (my words, not his). But having got here and read the reviews, I ended writing this not for Ayache's sake, but rather for the sake of his book. It deserves the patience required, trust me. It's genius and, perhaps (to me) more importantly, really very clever.

15 of 21 people found the following review helpful:

3.0 out of 5 stars Please Concentrate, October 14, 2010

By 

William Russell (Washington DC) - See all my reviews
(REAL NAME)   

Amazon Verified Purchase

This review is from: The Blank Swan: The End of Probability (Hardcover)

I love the books "The Black Swan", "Fooled by Randomness", and "Against the Gods". Those are great books, insightful, and easy to read.

However, since I have only average intelligence, I have to read each sentence in this book two or three times, and then think about it. So this is a very slow read for me. I'll illustrate what I mean. For example, on page 5 we have the sentence, "Contingency is the writing/trading thread that we keep pursuing despite the fact that the context has been saturated by replication." That's a great sentence. Unfortunately, it took me two days of thinking before I understood it. This is an interesting book, but it is not a leisurely read for the average Joe.