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What if Black-Scholes is wrong?

Columnist and author Michael Lewis notes that Black-Scholes--AKA black holes--really has been ingrained into the financial industry. Pensions, hedge funds, compensation committees, risk managers--all rely on Black Scholes and its variants. Lewis raises an interesting question though: What if the model is wrong? He notes that the theory falls apart when markets panic. And he even quotes a few people saying that nobody really believes in the equation anymore. One former trader, Nassim Nicholas Taleb, via economic papers, is attacking the theory head on.  

For more:
- here's Lewis' column in Portfolio

Related articles:
Goldman Sachs a target of shareholders? Article

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Comments

i'm neither an economist nor a mathematician but as soon as i read the "black-scholes" equation i knew it was wrong as it's based on unrealistic value assumptions. and ommits a simple factor which is the value of the currency. value of currency is subject to two major factors, forex markets and inflation (and i'm not even here mentioning the political risk: devaluation!!!)
I could write here pages and pages, tearing the equation down, but it's so simple, it's boring. Thinking that some half-witted high flyers have created 24 quadrillions of intangible assets based on assumptions is laughable, or clever! get ready people, we are on for a big loss!!! when the tree comes down, the big boys will still be on top cause all they need do is burn the balance sheet and tell you they've lost your money cause after all they didn't really mean it when they conned you by saying it was a risk-free investment and that it's your fault if you were gullible enough to believe that risk free investments actually exist!

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