Pricing the Future: Finance, Physics, and the 300-year Journey to the Black-Scholes Equation

Description

Options have been traded for hundreds of years, but investment decisions were based on gut feelings until the Nobel Prize-winning discovery of the Black-Scholes options pricing model in 1973 ushered in the era of the quants." Wall Street would never be the same. In Pricing the Future , financial economist George G. Szpiro tells the fascinating stories of the pioneers of mathematical finance who conducted the search for the elusive options pricing formula. From the broker's assistant who published the first mathematical explanation of financial markets to Albert Einstein and other scientists who looked for a way to explain the movement of atoms and molecules, Pricing the Future retraces the historical and intellectual developments that ultimately led to the widespread use of mathematical models to drive investment strategies on Wall Street.

George G. Szpiro is a mathematician, financial economist, and journalist. He is the Israel correspondent of the Swiss daily Neue Zrcher Zeitung and has published in Science, Nature, and the Jerusalem Report. He is the author of Kepler's Conjecture, The Secret Life of Numbers, Poincare's Prize, and Numbers Rule. He lives in Switzerland.

Andrew Lo, Harris & Harris Group Professor of Finance and Director of the Laboratory for Financial Engineering, Massachusetts Institute of Technology "This is a fascinating historical account of the origins of modern finance and the Black-Scholes/Merton option-pricing formula, by a consummate expositor who also happens to be a first-rate financial economist. Those who think finance is a science will be surprised by the serendipitous events that delayed the discovery of the option-pricing formula by 73 years; those who think finance is an art will be shocked by the deep connections between option-pricing, physics, and probability theory. No matter what your background, you'll want to read this book slowly--like a rare vintage port, it's meant to be sipped slowly and every drop savored." Robert P. Inman, Richard K. Mellon Professor of Finance and Economics, The Wharton School of the University of Pennsylvania "One of the major intellectual achievements of the 20th century was the theory of option pricing. This is its story, and it's absolutely fascinating. Options have been around since the buying and selling of tulips and the very first efforts of investors to control their downside risk. But the economic value of such protections was not finally understood until the Nobel Prize winning research of Fischer Black, Myron Scholes, and Robert Merton in the 1970's. It could not have happened without 350 years of serious thinking by botanists, physicists, chemists, and mathematicians. Finally, by 1960 all the pieces were in place, and Black, Scholes, and Merton solved the puzzle. The book should be required reading of all first year PhD students in finance, and economics, simply to see what is needed for path-breaking research. For the rest of us with an interest in the origins of important ideas, this is a great read." Sylvia Nasar, author of Grand Pursuit: The Story of Economic Genius and A Beautiful Mind: The Life of Mathematical Genius and Nobel Laureate John Nash "George Szpiro's crisp prose, clever vignettes and refreshingly concise explanations make finance history go down like gelato on a summer's day." Franklin Allen, Nippon Professor of Finance and Economics, The Wharton School of the University of Pennsylvania "George Szpiro has written a wonderful book. Often finance is viewed as one of the driest of fields. Szpiro makes the history of the option pricing formula fascinating at many levels. He starts with the history of options, bringing in the Tulipmania, the Dutch East India Company, the Amsterdam Bourse, Joseph de La Vega, John Law's colorful life and on and on. The mathematical tools needed for deriving the formula and the people who developed them are also heroes of the tale. The climax is reached with Fisher Black, Myron Scholes and Robert Merton's time together at MIT and the derivation of the formula that revolutionized finance. It is a book that is very difficult to put down. This will be true for beginning students of finance as well as the highest earning traders. I thoroughly recommend it!"