Posted by: Alexandre Borovik | February 16, 2012

Ian Stewart: The mathematical equation that caused the banks to crash

Ian Stewart in the The Observer Sunday February 12 2012:

The Black-Scholes equation was the mathematical justification for the trading that plunged the world’s banks into catastrophe

It was the holy grail of investors. The Black-Scholes equation, brainchild of economists Fischer Black and Myron Scholes, provided a rational way to price a financial contract when it still had time to run. It was like buying or selling a bet on a horse, halfway through the race. It opened up a new world of ever more complex investments, blossoming into a gigantic global industry. But when the sub-prime mortgage market turned sour, the darling of the financial markets became the Black Hole equation, sucking money out of the universe in an unending stream.

Read more in The Guardian.

[with thanks to muriel]

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