The Blank Swan: The End of Probability - Hardcover

Ayache, Elie

Hardcover

ISBN 10: 0470725222 ISBN 13: 9780470725221

Publisher: Wiley, 2010

Synopsis

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.

About this title

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 Back Cover

"Elie Ayache is the only person to present arguments about The Black Swan and rare events that I had not thought about. He does what philosophical inquiry has always done: to go the extra mile and look at the world in a deeply philosophical way."
Nassim Nicholas Taleb, PhD, author of The Black Swan, Distinguished Professor, New York University Polytechnic Institute & Principal, Universa Investments.

"Elie Ayache has uniquely straddled the down-to-earth world of money and complex financial derivatives and the abstract world of the mind and philosophy. Insightful and insane in equal measures, this book is not an easy read. I wouldn't recommend this for holiday reading on the beach but perhaps for while sitting in front of a log fire with a large Scotch, or probably several.???
Paul Wilmott, author of Frequently Asked Questions in Quantitative Finance

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. The book also 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."

About this edition

• Publisher: Wiley
• Publication date: 2010
• ISBN 10: 0470725222
• ISBN 13: 9780470725221
• Binding: Hardcover
• Language: English
• Edition number: 1
• Number of pages: 496