Guilty Bystander
01-08-2009, 10:17 AM
Triana is a teammate of Nassim Taleb.
http://www.wilmott.com/blogs/PabloTriana/enclosures/Nobel%20Petition.pdf
Pablo Triana - climacover@gmail.com Dec 2008
PETITION TO THE NOBEL COMMITTEE AND SWEDEN´S CENTRAL BANK
In light of the current credit crisis, which has already lasted well over eighteen months and has had the
deleterious effects known to all (disappearance of the investment banking industry, tanking markets,
untold volatility, monster losses, a freeze-over of the lending system, massive lay-offs, economic
stagnation, unprecedented state intervention), we want to make the following statement to the Nobel
Committee and the Sveriges Riksbank (Sweden´s Central Bank):
The main factor behind the unleashing of the crisis was the widespread use of flawed
quantitative/theoretical methodology by financial institutions, with the enthusiastic blessing and
encouragement of regulators and the academic financial economics establishment
We can highlight at least two key culprits: the Value at Risk (VaR) model for “measuring” risk
and setting capital charges, and the Gaussian Copula model for valuing and rating Subprime
Collateralized Debt Obligations; by avidly abiding by (among other) those two scions of
quantitative finance, the financial industry guaranteed that never before was risk so badly
anticipated and valuations and credit ratings so hopelessly off-base. The inevitable end result was
massively leveraged exposures to impossibly overrated toxic securities, which brought the
system down as the underlying mortgage market turned sour
The Sveriges Riksbank has had a decades-long habit of rewarding flawed, unworldly, and
dangerous theoretical finance constructs with its “Sveriges Riksbank Prize in Economic Sciences
in Memory of Alfred Nobel” (colloquially known as the Nobel Prize in Economics) thus
endowing such machinations with unlimited global credibility and respectability, decisively
encouraging their real-life adoption and helping silence any possible skeptics
At least two of the theories awarded with the Economics “Nobel” have been behind the very
worst financial crises to have afflicted the world since the 1929 crash; Black-Scholes-Merton was
the inspiration for the strategies that gave us October 1987´s Black Monday, the most
devastating one-day drop in the history of Wall Street (which gravely threatened to sink the
system); while Portfolio Theory was the inspiration for the creators and adopters of VaR, which
outrageously misguided guidance and capacity for forcing destabilizing liquidations were to
blame for the 1998 LTCM crisis and the current malaise (both of which, certainly, put us in
great peril)
It is high time that wildly Platonic, wildly unworldly, wildly dangerous theories (that, by the
way, have never solved a previously unsolved practical problem) stop being glowingly rewarded
by those who claim to be the torch-carriers for Alfred Nobel (who, by the way, never said
anything about a prize for Economics, let alone its financial branch)
By rewarding wildly Platonic, wildly unworldly, wildly dangerous theories, the Nobel
Committee (as aiding and abetting enabler) and the Sveriges Riksbank (as direct instigator) put
the world in great danger and make the possibility of future meltdowns that much more plausible
The unhealthy obsession with assigning precise measurements to that which is not amenable to
concrete quantification has gotten us in enough trouble already; by relentlessly and consistently
embracing and promoting theories that promise precision and concreteness (yet are built upon
unremittingly flawed foundations) the Nobel Committee and the Sveriges Riksbank lead us
down the path of painful deleteriousness
The safety of the global economy should always be far more important than satisfying the ego
(and bank accounts) of non-scientists bent on applying dodgy scientific methodology to
disciplines that are practical-only in nature, and who never show the humbleness to admit their
mistakes and responsibility for never-ending havoc-wreaking
Platonic, unworldly, and dangerous finance theories simply cannot go on being endowed with
the Nobel stamp of approval! A lot is at stake, drastic action must be urgently taken, and bad
practices cannot be prolonged any longer
If the Nobel Committee and the Sveriges Riksbank persist in choosing the pleasing of the
financial economics politburo over the salubriousness of the system, we suggest that they at least
drastically modify the name of the award (allow me suggest “Sveriges Riksbank Prize in
Platonic Potentially-Lethal Typically-Impractical Financial Economics”). We need those
Scandinavians to be incommensurately honest, so that naïve outsiders understand the true nature
of what´s being glorified. Finance theory run amok can kill. Adding a big disclaimer onto the
“Nobel” that regularly endows the theories with a far-reaching seal of approval would be a
reasonably healthy protective step on our part.
Pablo Triana
Derivatives consultant and author Lecturing Birds On Flying (May 2009, Wiley)
http://www.wilmott.com/blogs/PabloTriana/enclosures/Nobel%20Petition.pdf
Pablo Triana - climacover@gmail.com Dec 2008
PETITION TO THE NOBEL COMMITTEE AND SWEDEN´S CENTRAL BANK
In light of the current credit crisis, which has already lasted well over eighteen months and has had the
deleterious effects known to all (disappearance of the investment banking industry, tanking markets,
untold volatility, monster losses, a freeze-over of the lending system, massive lay-offs, economic
stagnation, unprecedented state intervention), we want to make the following statement to the Nobel
Committee and the Sveriges Riksbank (Sweden´s Central Bank):
The main factor behind the unleashing of the crisis was the widespread use of flawed
quantitative/theoretical methodology by financial institutions, with the enthusiastic blessing and
encouragement of regulators and the academic financial economics establishment
We can highlight at least two key culprits: the Value at Risk (VaR) model for “measuring” risk
and setting capital charges, and the Gaussian Copula model for valuing and rating Subprime
Collateralized Debt Obligations; by avidly abiding by (among other) those two scions of
quantitative finance, the financial industry guaranteed that never before was risk so badly
anticipated and valuations and credit ratings so hopelessly off-base. The inevitable end result was
massively leveraged exposures to impossibly overrated toxic securities, which brought the
system down as the underlying mortgage market turned sour
The Sveriges Riksbank has had a decades-long habit of rewarding flawed, unworldly, and
dangerous theoretical finance constructs with its “Sveriges Riksbank Prize in Economic Sciences
in Memory of Alfred Nobel” (colloquially known as the Nobel Prize in Economics) thus
endowing such machinations with unlimited global credibility and respectability, decisively
encouraging their real-life adoption and helping silence any possible skeptics
At least two of the theories awarded with the Economics “Nobel” have been behind the very
worst financial crises to have afflicted the world since the 1929 crash; Black-Scholes-Merton was
the inspiration for the strategies that gave us October 1987´s Black Monday, the most
devastating one-day drop in the history of Wall Street (which gravely threatened to sink the
system); while Portfolio Theory was the inspiration for the creators and adopters of VaR, which
outrageously misguided guidance and capacity for forcing destabilizing liquidations were to
blame for the 1998 LTCM crisis and the current malaise (both of which, certainly, put us in
great peril)
It is high time that wildly Platonic, wildly unworldly, wildly dangerous theories (that, by the
way, have never solved a previously unsolved practical problem) stop being glowingly rewarded
by those who claim to be the torch-carriers for Alfred Nobel (who, by the way, never said
anything about a prize for Economics, let alone its financial branch)
By rewarding wildly Platonic, wildly unworldly, wildly dangerous theories, the Nobel
Committee (as aiding and abetting enabler) and the Sveriges Riksbank (as direct instigator) put
the world in great danger and make the possibility of future meltdowns that much more plausible
The unhealthy obsession with assigning precise measurements to that which is not amenable to
concrete quantification has gotten us in enough trouble already; by relentlessly and consistently
embracing and promoting theories that promise precision and concreteness (yet are built upon
unremittingly flawed foundations) the Nobel Committee and the Sveriges Riksbank lead us
down the path of painful deleteriousness
The safety of the global economy should always be far more important than satisfying the ego
(and bank accounts) of non-scientists bent on applying dodgy scientific methodology to
disciplines that are practical-only in nature, and who never show the humbleness to admit their
mistakes and responsibility for never-ending havoc-wreaking
Platonic, unworldly, and dangerous finance theories simply cannot go on being endowed with
the Nobel stamp of approval! A lot is at stake, drastic action must be urgently taken, and bad
practices cannot be prolonged any longer
If the Nobel Committee and the Sveriges Riksbank persist in choosing the pleasing of the
financial economics politburo over the salubriousness of the system, we suggest that they at least
drastically modify the name of the award (allow me suggest “Sveriges Riksbank Prize in
Platonic Potentially-Lethal Typically-Impractical Financial Economics”). We need those
Scandinavians to be incommensurately honest, so that naïve outsiders understand the true nature
of what´s being glorified. Finance theory run amok can kill. Adding a big disclaimer onto the
“Nobel” that regularly endows the theories with a far-reaching seal of approval would be a
reasonably healthy protective step on our part.
Pablo Triana
Derivatives consultant and author Lecturing Birds On Flying (May 2009, Wiley)