BBC
It is kind of hard to believe that one simple equation can have a dramatic effect on the oh-so-stable world economy. We would like to think that the decisions we make are based on our whim and not that of programmed thought and reactions which are out of our control. However, the Black-Scholes equation is no ordinary equation either however and is a result of financial uncertainty over 100's of years.
A young man named Scholes was always interested in the stockmarket and even during his teen years begged his mom to let him open a stock-market account to trade with. After he got a job at MIT, he was presented with a problem that would forever change his, and billions of other lives. It was the concept of being able to establish a certain price on an item, and then you can buy that item at that stated price anytime in the next year, regardless if the actual price of the item goes up or down. Intrigued, he dives deeper into how the variables all correlate and fit together and after a couple years comes up with the Black-Scholes forumua.
This formula quickly showed is prowess by eliminating all the current stock traders who were generally succeusful by relying on experience and intuition. Now basically all the market relied on this one formula, but everyone began to become dependent on the equation and next thing you know, companies could bankrupt themselves over a mistake made in simplifications of the math.
The lesson to be learned is that although you can make yourself falsely believe that you have definit control over a stock market, it is really all up to chance and no formula can really change that.
It is kind of hard to believe that one simple equation can have a dramatic effect on the oh-so-stable world economy. We would like to think that the decisions we make are based on our whim and not that of programmed thought and reactions which are out of our control. However, the Black-Scholes equation is no ordinary equation either however and is a result of financial uncertainty over 100's of years.
A young man named Scholes was always interested in the stockmarket and even during his teen years begged his mom to let him open a stock-market account to trade with. After he got a job at MIT, he was presented with a problem that would forever change his, and billions of other lives. It was the concept of being able to establish a certain price on an item, and then you can buy that item at that stated price anytime in the next year, regardless if the actual price of the item goes up or down. Intrigued, he dives deeper into how the variables all correlate and fit together and after a couple years comes up with the Black-Scholes forumua.
This formula quickly showed is prowess by eliminating all the current stock traders who were generally succeusful by relying on experience and intuition. Now basically all the market relied on this one formula, but everyone began to become dependent on the equation and next thing you know, companies could bankrupt themselves over a mistake made in simplifications of the math.
The lesson to be learned is that although you can make yourself falsely believe that you have definit control over a stock market, it is really all up to chance and no formula can really change that.
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