Mathemagical Thinking Archive
The Black-Scholes Magic Trick, Explained!
Posted by David in Mathemagical Thinking On August 27, 2023
The economist Paul Romer once compared the models used in finance with the tricks used by magicians, whose secrets are protected by the Magician’s Oath. As he wrote in 2015, “A model is like doing a card
It’s A Conspiracy I Tell You!
Posted by Paul in Mathemagical Thinking On November 12, 2019
I don’t believe in conspiracy theories but — whenever you hear the “but” you know exactly what is coming! — there is one story that is rather worrisome, and also something to which one can trivially add
The Prediction Test
Posted by David in Mathemagical Thinking On October 30, 2019
The two most famous theories in the field of forecasting are the butterfly effect, and the efficient market hypothesis. Both are theories, not of prediction, but of non-prediction. The butterfly effect was developed by MIT meteorologist and
Simplify!
Posted by Paul in Mathemagical Thinking On October 2, 2019
The following may or may not be factually accurate. It all happened a long time ago. But it is absolutely 100% correct in spirit. Twenty or so years ago I was browsing through the library of Imperial
Perspective
Posted by Paul in Mathemagical Thinking On October 2, 2019
I love watching Dragons’ Den, the programme in which entrepreneurs try to get established business people to invest in their ideas. I love trying to predict which Dragon will say what, how they will negotiate a deal,
Rule #1 Of Investing: Don’t Obey Rule #1
Posted by Paul in Mathemagical Thinking On October 1, 2019
One of the first lessons in any course on investing will be about portfolio construction and the benefits of diversification, how to maximize expected return for a given level of risk. If assets are not correlated then
The Wealth Manager
Posted by Paul in Mathemagical Thinking On September 27, 2019
Following on from Credit Ratings, here’s a true story about how reassuring mathematical analysis can be. Until it turns out to be baloney. This story is also a warning about experts. Unfortunately, although there’s a lesson here
Credit Ratings
Posted by Paul in Mathemagical Thinking On September 27, 2019
Didn’t you feel proud when your teacher gave you an A+ at school? Or were you a C student, must try harder? Don’t tell us you were an F! My, you’ve done well…considering. Just as teachers grade
Experts? Phooey!
Posted by Paul in Mathemagical Thinking On September 26, 2019
Experts, who needs ’em? Until recently we’d all have said everyone. But that pendulum has swung all the other way. Experts? They don’t know what they are talking about. We understand this sentiment. We’ve criticized experts in
Am I Being Random, Still?
Posted by Paul in Mathemagical Thinking On September 26, 2019
What if we tossed a coin ten times and got HHHHHHHHHH and then we asked you to bet on the next toss? Ten Hs in a row has a probability ½^10= 0.0009765625. Pretty unlikely. But any mathematician
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