Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? [Hardcover]

Pablo Triana (Author), Nassim Nicholas Taleb (Foreword)

Book Description

Publication Date: June 9, 2009

Praise for Lecturing Birds On Flying

"Finally, a book taking a critical look at quantitative finance models, illuminating both their flawed fantasy assumptions as well as the uncritical use of such models on Wall Street, in many cases, leading to billion dollar losses. Pablo Triana knows both the financial industry and the academic community from the inside. A must-read for anyone interested in finance."
—Dr. Espen Gaarder Haug, trader, thinker, and author of Derivatives Models on Models

"A thoroughly readable explanation of the problems that have beset the models and quantitative techniques that have underpinned so much of finance in recent years. If only the bankers had heeded this message a few years before, we might not be in such a big mess today."
—Gillian Tett, Assistant Editor of the Financial Times, overseeing global financial markets coverage, and author of Fool's Gold

"Pablo Triana dismembers quantitative finance, in theory and in practice, with expertise, anger,and an excellent eye for the illuminating anecdote. By the time he has finished marshalling his evidence, his call to replace complex equations with something more like common sense sounds like, well, common sense."
—Edward Hadas, Assistant Editor at Breakingviews.com; and author of Human Goods, Economic Evils: A Moral Approach to the Dismal Science

"Pablo Triana is an entertaining and engaging writer, even on the dry subject of finance theory. His debunking of conventional wisdom is a treat."
—Pauline Skypala, Editor, FTfm, Financial Times

"Triana's book is an unrelenting fusillade of detailed and irrefutable arguments against financial theorems and those who teach them. It should, by rights, spark a revolution in both investment banks and business schools. But, at the very least, it is required reading for anyone who would regulate the finance industry."
—Felix Salmon, Finance Blogger, Reuters

Editorial Reviews

Review

"Points to the over-reliance on financial models and quantitative techniques as what ultimately brought down the financial markets. Sure, many of us feel that we have heard enough on this topic-do we really need another book about the financial mess and how it all began? Yes, we do. . . Triana's impressive knowledge and experience allows him to dig deeper and go beyond the mere musings of his published peers."
—Risk Management Magazine

"Readers of this book may make quite a lot of noise. . . Some will cheer out loud; others will yelp as cherished beliefs are torn into. At times, the book is deliberately incendiary. Triana is trying to stimulate debate. . . On the whole, this is a good read."
—The Financial Times, July 23rd 2009

"...calls for a return to "good old fashioned commonsense decision making"."
—Daily Express, June 4th 2009

"This book explains how it is that theoretical finance can fail dramatically in the real world."
—Finanace & Management Faculty, June 2009

"The book is fizzing with ideas"
—The Economist, June 29th 2009

" Triana’s book will ruffle a lot of feathers, but it also will make many readers think hard."
—BizEd

"A deeply unsettling insider account of how bogus mathematics overtook finance and was a key contributor to the financial collapse of 2008-2009 . . . With deep insight, Triana deconstructs the "pillars" of mathematical finance . . . Like Nassim Taleb, celebrated author of The Black Swan (2007), Triana is calling for major surgical reform of such business schools' curricula. An important addition to our deeper understanding of how finance must be reformed."
—Hazel Henderson, Ethical Markets

"Should the Nobel Prize for economics be abolished? That is one of the suggestions in Pablo Triana's provocative book "Lecturing Birds on Flying: Can Mathematical Theories Destroy the Markets?" . . . As Nassim Nicholas Taleb writes in his witty introduction to the book, giving someone the wrong map is worse than giving them no map at all. . . a good read. Some may find the elaborate prose closer to Cervantes than to, say, Nobel Prize winner Robert Merton -- annoying. But perhaps Cervantes is the right writer to emulate when tilting at windmills. "
—LA Times

"The highlight of Triana's book is his valuable insights into the problems with mathematical economic models, which make his argument quite forceful."
—Shanghaidaily.com

From the Inside Flap

For the past few decades, the financial world has often displayed an unreasonable willingness to believe that "the model is right, the market is wrong," in spite of the fact that these theoretical machinations were largely responsible for the stock market crash of 1987, the LTCM crisis of 1998, the credit crisis of 2008, and many other blow-ups, large and small. Why have both financial insiders (traders, risk managers, executives) and outsiders (academics, journalists, regulators, the public) consistently demonstrated a willingness to treat quantifications as gospel? Nassim Taleb first addressed the conflicts between theoretical and real finance in his technical treatise on options, Dynamic Hedging. Now, in Lecturing Birds on Flying, Pablo Triana offers a powerful indictment on the trustworthiness of financial theory, explaining-in jargon-free plain English-how malfunctions in these quantitative machines have wreaked havoc in our real world.

Triana first analyzes the fundamental question of whether financial markets can in principle really be solved mathematically. He shows that the markets indeed cannot be tamed with equations, presenting a long and powerful list of obstacles to prove his point: maverick unlawful human actions rule the markets, unexpected and unimaginable events shape the markets, and historical data is not necessarily a trustworthy guide to the future of the markets. The author then examines the sources of origin of many prevalent theories and mathematical dictums. He details how the field of financial economics evolved from a descriptive discipline to an abstract one dedicated to technically concocting professors' own versions of how such a world should work. He goes on to explain how Wall Street and other financial centers became eager employers of scientists, and how scientists became eager employees of financial firms. Triana concludes with an in-depth discussion of the most significant historical episodes of theory-caused real-life market malaise, with a strong emphasis on the current credit crisis.

In the end, Lecturing Birds on Flying calls for the radical substitution of good old-fashioned common sense in place of mathematical decision-making and the restoration to financial power of those who are completely unchained to the iron ball of classroom-obtained qualifications.

See all Editorial Reviews

Product Details

• Hardcover: 400 pages
• Publisher: Wiley; 1 edition (June 9, 2009)
• Language: English
• ISBN-10: 0470406755
• ISBN-13: 978-0470406755
• Product Dimensions: 6.4 x 1.3 x 9.4 inches
• Shipping Weight: 1.4 pounds (View shipping rates and policies)
• Average Customer Review: 2.3 out of 5 stars  See all reviews (26 customer reviews)
• Amazon Best Sellers Rank: #929,575 in Books (See Top 100 in Books)

More About the Author

Pablo Triana has successful derivatives experience at all levels: on the trading floor and as a professor, consultant, and author. He is a frequent contributor to business publications, including the Financial Times, Forbes.com, Breakingviews.com, and Risk magazine, among others. Triana is also the author of Corporate Derivatives. He holds a master of science from the Stern School of Business, New York University, and a master of arts from American University.

Most Helpful Customer Reviews

68 of 74 people found the following review helpful

1.0 out of 5 stars Lecturing traders on writing July 5, 2009

By Lewis A. Glenn

Format:Hardcover|Amazon Verified Purchase

I was attracted to this book partly by the intriguing title, but mostly by the fact that the foreword was written by Nassim Nicholas Taleb, the author of 2 fascinating books on roughly the same material, "Fooled by Randomness" and "The Black Swan".

I was expecting more of the same from Triana, but with perhaps a slightly different viewpoint and possibly more details. What I got was a 350 page polemic from a confirmed math phobe and a slavish paen to Taleb. OK, Black-Scholes is not a great idea and VAR greatly underestimates market risk, but to repeat this theme again and again borders on the lunatic.

But that's not all, here's a quote from p. 203 that sums up the style of writing; he's referring (endlessly) to Black-Scholes-Merton and, in this case, to the S&P 500 volatility surface: "...Obviously, horizontal is not the same as curved. A curved line is a complete violation of BSM. Horizontal is not the same as curved. The end results are not BSM-compliant any more. It's not BSM. Curved is not horizontal. It's something else. BSM endorses horizontality. BSM negates curvedness. It can't be BSM. Curved is not horizontal". I kid you not.

The message of the book, delivered amply in Taleb's foreword and elsewhere, is that too often in the past econometric models put foward by the likes of Merton, Scholes and others have been blindly followed by market makers and regulators, with resultant disastrous effects. Unfortunately, Triana adds little additional insight and commits the greatest of all faults an author can make--to bore the reader.

45 of 50 people found the following review helpful

2.0 out of 5 stars The most repetitive book ever written July 6, 2009

By Socrates Socrates

Format:Hardcover|Amazon Verified Purchase

I read Nassim Nicholas Taleb books, "Fooled by Randomness" and "...Black Swan"; so I figured (regrettable, on hindsight) given that Taleb wrote the foreword then the book would be on par with his books! I was wrong.

Negatives:

The book is way too repetitive!
-Imagine going for >74 pages (that's the longest chapter, #7) of repetition. Not only is he repeating lines from other chapters, no.... at times from the the same paragraph!

The writing style is rather weird.
- At some point he mentions Victor Niederhoffer by name and then at another chapter, he talks about the same story but this time it's no longer Victor but rather a "famous speculator"
- Again, he mentions Emanuel Derman by name and then in another chapter, he talks about the same story but this time, it's not longer Emanuel but it's now a "...famous quant/academic..."!
- I coud go on....

Positive(s):

His understanding of the subject is not in question, at least not by me!
His opinions on VaR, BSM.
His opinions on the need for change, especially the financial economics professors' influence in the real world of finance
The relating of his work experience is another positive

All in all, I'd rather pass on the book, for I can assure anyone that the repetitiveness will be found very annoying.

19 of 19 people found the following review helpful

3.0 out of 5 stars A lot of trouble, but some useful insight November 2, 2009

By Aaron C. Brown TOP 500 REVIEWERVINE™ VOICE

Format:Hardcover

I agree with the complaints about repetitiveness and poor writing, but it is possible to understand this book. Most poor writing springs from unclear thinking, it is usually not worth deciphering. In this case I blame passion and unfamiliarity with English. If you eliminate all adverbs, ignore everything splitting infinitives, assume prepositions were chosen randomly, recast all sentences into present tense, active voice, indicative mood (the author is very fond of the inverted pluperfect subjunctive, perhaps from reading a lot of 19th century English poetry or conversing with Yoda) and eliminate irrelevant words borrowed from clichés, the book makes sense. For example:

"It is not fanatically expected that those pros who bring advanced analytics into the fold of practice would believe that the adopted models have a high chance of igniting trouble down the road. Rather, they would be assumed to be hopeful about the possible gains to be obtained by pledging allegiance to the math, whether in the shape of better prices, improved hedges, or more accurate risk measurements (the exception here would be those situations where financiers are forced by regulators to embrace a particular quantitative construct, the foundations of which they agitatedly distrust and which side effects they massively fear)."

Means simply:

"Quants do not build models to cause trouble. They hope models improve pricing, hedging and risk management. Sometimes bad models are imposed by regulators."

I understand most readers will not go through the trouble of decoding the prose. If they do, however, they will find there are some original points here, different from Taleb and Derman. They will also find junk. Triana constructs several straw man arguments, then loses to them ungraciously, heaping sarcasm rather than admitting defeat. I disagree with those reviewers who praised his views on Black-Scholes-Merton and Value-at-Risk, those views are deeply misinformed. One of his basic errors, repeated frequently, is to claim the goal of risk management is to predict and prevent disasters. People who guess the future and people who fear failure are the enemies of risk managers. Risk management means trying to prepare for anything that might happen, not guessing the future nor insuring no bad things ever happen. Institutions with good risk management fail often and fail fast, institutions with bad risk management fail only once.

The book's original contribution is to defend traditional corporate finance, as practiced in the United States from about 1910 to 1970. Triana is deeply reactionary. His only similarity to the revolutionaries and technocrats he quotes is dislike of current practice. Taleb wants to throw away prediction and measurement and face the unpredictable future with elegance. Derman wants us to understand the limits of models, to continue on our present course but with more humility and broader vision. Triana wants to go back to a simpler time when hands-on managers used simple math and no theory. There is a strong religious streak in this book, on the "may the force be with you" level.

Few people have less sympathy for this view than I do, but I still found it a useful and thought-provoking argument. I cannot recommend this book for general readers, but if you are very interested in this stuff and have the patience to wade through the style and repetition, you will learn things from it.