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Pricing the Future: Finance, Physics, and the 300-year Journey to the Black-Scholes Equation Hardcover – November 29, 2011
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George Szpiro has written a wonderful book. Often finance is viewed as one of the driest of fields. Szpiro makes the history of the option pricing formula fascinating at many levels. He starts with the history of options, bringing in the Tulipmania, the Dutch East India Company, the Amsterdam Bourse, Joseph de La Vega, John Law’s colorful life and on and on. The mathematical tools needed for deriving the formula and the people who developed them are also heroes of the tale. The climax is reached with Fisher Black, Myron Scholes and Robert Merton’s time together at MIT and the derivation of the formula that revolutionized finance. It is a book that is very difficult to put down. This will be true for beginning students of finance as well as the highest earning traders. I thoroughly recommend it!”
Andrew Lo, Harris & Harris Group Professor of Finance and Director of the Laboratory for Financial Engineering, Massachusetts Institute of Technology
"This is a fascinating historical account of the origins of modern finance and the Black-Scholes/Merton option-pricing formula, by a consummate expositor who also happens to be a first-rate financial economist. Those who think finance is a science will be surprised by the serendipitous events that delayed the discovery of the option-pricing formula by 73 years; those who think finance is an art will be shocked by the deep connections between option-pricing, physics, and probability theory. No matter what your background, you'll want to read this book slowlylike a rare vintage port, it's meant to be sipped slowly and every drop savored."
Robert P. Inman, Richard K. Mellon Professor of Finance and Economics, The Wharton School of the University of Pennsylvania
One of the major intellectual achievements of the 20th century was the theory of option pricing. This is its story, and it’s absolutely fascinating. Options have been around since the buying and selling of tulips and the very first efforts of investors to control their downside risk. But the economic value of such protections was not finally understood until the Nobel Prize winning research of Fischer Black, Myron Scholes, and Robert Merton in the 1970’s. It could not have happened without 350 years of serious thinking by botanists, physicists, chemists, and mathematicians. Finally, by 1960 all the pieces were in place, and Black, Scholes, and Merton solved the puzzle. The book should be required reading of all first year PhD students in finance, and economics, simply to see what is needed for path-breaking research. For the rest of us with an interest in the origins of important ideas, this is a great read.”
Sylvia Nasar, author of Grand Pursuit: The Story of Economic Genius and A Beautiful Mind: The Life of Mathematical Genius and Nobel Laureate John Nash
George Szpiro’s crisp prose, clever vignettes and refreshingly concise explanations make finance history go down like gelato on a summer’s day.”
Szpiro unravels the complexity of the Black-Scholes equation and its fascinating relationship to Einstein’s application of statistics in explaining the random motion of molecules and to Norbert Wiener’s discovery of Cybernetics. In the case of options, it is option prices rather than molecules that jiggle.... An interesting history of mathematics and its application to economics and the world of high finance.”
Recounting the lineage of the options pricing equation, Szpiro launches from an example of irrational exuberance that led to ruinHolland’s tulip mania in the 1630sinto the Paris bourse of the late 1800s, when a series of math-minded characters pondered the pricing problem. As their biographies, some quite d
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Top Customer Reviews
An extensive very complementary review can be found in the Economist magazine: [...] .
In the realm of full disclosure: I read an early draft of a chapter of the book and made some comments.
As a historian, the author has done superb research. He does a good job at connecting the dots of the various luminaries across time that established the theoretical preceding foundation that allowed for a team of three contemporary geniuses to put it all together in 1973 (Black, Scholes, Merton).
Yet, the author lingers on certain topics way too long for the sake of his book's rhythm. At the beginning, his studies of investment manias (tulip bubble, the Mississippi and the East Indies bubble) goes on for too long. Then, his exploration of the Brownian movement whereby particles move by the square root of time (which applies to stock price movement too) is so lengthy it dominates the entire book. He narrates how numerous scientists from many different disciplines uncovered this perplexing principle independently. By the third time that such a scientist had rediscovered that principle, I began to get cross eyed. Actually, this book is more about Brownian motion than the BS formula.
The last quarter of the book is the better one. All of a sudden the author realized he had much ground to cover and got moving. His description of the three main protagonists (Black, Scholes, Merton) is good.Read more ›
There's interesting coverage of Norbert Weiner and the development of cybernetics, as related to finance. Szpiro does a good job relating how Harry Markowitz and others modernized the work of Bachelier, leading to Nobel prizes for Markowitz, Merton and Scholes. The book examines minutely the entrance of "quants" into the field of derivative finance. There's a very good history of LTCM, with its founders, methods and failure. It might be the best available, although the reason for potential bank losses provoking federal intervention is not made clear.
Except for the LTCM case and an attempt in the last chapter, limitations and failures of statistical applications are not covered. The attempt in the last chapter is based solely on statistical considerations. Brownian motion is significant only in a closed environment. In a stream or an ocean it's a small component of particle motion. A financial market is more like an ocean than like a petri dish.Read more ›
Here is a precis of the relevant standard history, from a mathematician's viewpoint. For various reasons [mathematicians couldn't make it fit with the rest of math, and physicists perceived the world in terms of deterministic laws], in 1900 mathematical probability had not yet become a coherent discipline. In particular there is a fundamental mathematical "square root law" providing a rough description of the cumulative effect of purely random fluctuations. Before 1900 this had been observed and explained in various contexts but not appreciated as a widely-applicable fact. Over the first third of the 20th century this (quite simple) law, the associated "Normal approximation" and the more technically sophisticated notion of the Wiener process as the fundamental model of "purely random" continuous fluctuations, all became well understood.Read more ›
Most Recent Customer Reviews
Haven't quite finished this, but I'm enjoying slowly reading it. The author takes the generalist through the developments in physics, mathematics, economics and finance that led... Read morePublished 11 months ago by David W. Drake
I am very impressed with this book, I bought the audio version and I cannot stop listening to it. George give a detailed very exciting story of the mathematicians, physicist,... Read morePublished on June 29, 2013 by Jennifer
This is an interesting historical read about the history of trading. Entertaining and informative. I recommend this book to all.Published on June 10, 2013 by Happy
Pricing the Future has its merits. It brings to light much financial history and reminds us that many things we now take for granted were obscure in 1900 or even 1970. Read morePublished on April 24, 2013 by William Meyers
As an engineer with much of the attendant knowledge of physical science and mathematics, I have been very curious about the quantitative side of financial markets. Read morePublished on February 2, 2013 by Amazon Customer
important reading for anyone studying or investing in options. the book is well written and informative, although it can be a slow and careful read.Published on August 8, 2012 by Amazon Customer
This is an excellent book that discusses the origin of Financial Mathematics and its relation to physics. Is full of interesting historical details.Published on August 5, 2012 by Ricardo Mansilla
Too many of us have learned options strategies and theory from texts that present it all in packages, now backed up by Excel spreadsheets with all the formulas embedded in them,... Read morePublished on May 29, 2012 by Scott E. Pardee