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Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? |  | Author: Pablo Triana
Creator: Nassim Nicholas Taleb
Publisher: Wiley
List Price: $29.95
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Rating:  15 reviews
Sales Rank: 160732
Media: Hardcover
Edition: 1
Pages: 400
Number Of Items: 1
Shipping Weight (lbs): 1.4
Dimensions (in): 9.1 x 6.3 x 1.4
ISBN: 0470406755
Dewey Decimal Number: 932
EAN: 9780470406755
ASIN: 0470406755
Publication Date: June 9, 2009
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Product Description
Praise for Lecturing Birds On Flying "Finally, a book taking a critical look at quantitative finance models, illuminating both their flawed fantasy assumptions as well as the uncritical use of such models on Wall Street, in many cases, leading to billion dollar losses. Pablo Triana knows both the financial industry and the academic community from the inside. A must-read for anyone interested in finance."
âDr. Espen Gaarder Haug, trader, thinker, and author of Derivatives Models on Models "A thoroughly readable explanation of the problems that have beset the models and quantitative techniques that have underpinned so much of finance in recent years. If only the bankers had heeded this message a few years before, we might not be in such a big mess today."
âGillian Tett, Assistant Editor of the Financial Times, overseeing global financial markets coverage, and author of Fool's Gold "Pablo Triana dismembers quantitative finance, in theory and in practice, with expertise, anger,and an excellent eye for the illuminating anecdote. By the time he has finished marshalling his evidence, his call to replace complex equations with something more like common sense sounds like, well, common sense."
âEdward Hadas, Assistant Editor at Breakingviews.com; and author of Human Goods, Economic Evils: A Moral Approach to the Dismal Science "Pablo Triana is an entertaining and engaging writer, even on the dry subject of finance theory. His debunking of conventional wisdom is a treat."
âPauline Skypala, Editor, FTfm, Financial Times "Triana's book is an unrelenting fusillade of detailed and irrefutable arguments against financial theorems and those who teach them. It should, by rights, spark a revolution in both investment banks and business schools. But, at the very least, it is required reading for anyone who would regulate the finance industry."
âFelix Salmon, Finance Blogger, Reuters
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Showing reviews 1-5 of 15
 Rambling, inarticulate rubbish giving no insights November 21, 2009
Chie Higashino
You'd be better off reading an academic textbook. Contrary to what Taleb and Triana claim, most academics do not make exaggerated claims about the power of their work. On the whole, their claims are very measured, and they flag the limitations of their models. Moreover, they write better English and don't indulge (as the insufferable Taleb does) in Narcissistic self-adulation.
An introduction to the theory and practice of ridicule November 9, 2009
Dr. Lee D. Carlson (Baltimore, Maryland USA)
The blame game for the current "financial crisis" is ongoing, with an intensity and volatility that is going way beyond the pale of any acceptable standards of human discourse. As this book is an excellent example of, the level of vituperation and ridicule is reaching the stratosphere, and shows no sign of abatement. At least for this reviewer, this book was tough to read, not because its technical content is difficult, which it is not, but rather because of the steady and irritating commentary on part of the author. In addition, he seems to switch from one position to its opposite, as if he flipped a coin while writing the book, with his stance depending on which side of the coin came up. In one part of the book he is excoriating the practitioners of "pure mathematical finance" for the bringing down of the markets. Just a few pages later he is revealing to the reader that such an approach was not even used at all, or at least minimally.
Between these Markov transitions from one position to the next, the author is busy indulging himself in distasteful and unprofessional ridicule of the "arrogant" and "self-serving" financial theorists who never spent a minute on the trading floor, and who were responsible for "terrible, theory-ignited mischief." Risk management he asserts should be handed back to "freethinking, gumption-honoring, innumerate chums". In other words, the financial decision-making should return to the use of "old-fashioned commonsense." Throughout the book he lifts up the quasi-mythical "Black Swan" symbolism in order to justify his belief in the power of "rare events" and the inability of VAR models to account for them.
One can certainly commend the author's rejection of social and intellectual hierarchies, and his encouragement of this rejection to the reader. Degrees, accolades, and exaggerated recommendations mean nothing when it comes to describing and understanding real systems. The only thing that matters is evidence, and this comes at a high cost, both in dollars and in time. The obtaining of true knowledge is difficult, and frequently must be done without worrying about recognition or monetary compensation. A high degree of mental discipline is required, along with large blocks of time.
But rebellion against authority and word arrows fired against stuffy, arrogant mathematicians does not prove a thesis. The author has failed to prove his in this book, in spite of the title and the page count. Indeed the writing and logic is confused and leaves the reader wanting as to what the author is really asserting:
- Quantitative finance is derided for its potential to "sow the seeds of market chaos" but the author does not define what "market chaos" is nor entertain the possibility that chaotic dynamics in a financial market may indeed be an efficient way of allocating capital and labor. There are several systems of interest, such as data networks and the human neural system, which depend on chaotic dynamics for their proper functioning.
- Financial engineers are scolded about their attempts to predict future market movements by sole reference to the past, but the author then praises the financial savvy of "commonsense" traders who acquired their knowledge and expertise by years of trading.
- In attempting to explain the (in his opinion, unjustified and reckless) adoption of techniques from quantitative finance, he author claims that it was also due to regulatory agencies or public relations but does not give one example, even anecdotal, to support this. Which regulatory and advertising agencies were involved?
- The 1987 "crash" is blamed on Black-Scholes-inspired trading strategies, but no convincing evidence is given anywhere in the book. And along these same lines the author refers to this as a "cataclysm", as do a few others in the financial press. But it would be just as easy to refer to it as merely a market correction, considering the behavior of the market a few days after "Black Monday." And just because a collection of wealthy people lose a lot of money does not mean that it is a "cataclysm."
- The claim that no mathematical model can capture the intricacies of human psychology. This is not true, as research into cognitive neuroscience will reveal. Although much work remains to be done in this area, it is progressing with all deliberate speed.
- The author asserts that humans are so unpredictable in their financial dealings that not even a "Prophet" could sort it all out. Humans "change the rules constantly". But on the other hand many times in the book he is proclaiming the wisdom of Leo-Malamed-type "commonsense" traders to do just that. Apparently folk wisdom and "commonsense" can "untangle" the "conundrums" of the financial markets. How many commonsense "chums" were actively involved in the 1929 Crash, the Latin American banking crisis in the 1980's, Black Monday in 1987, the bond market meltdown in 1994, the Asian 1997 crisis, the 1998 Russian default, the 2000 NasDaq crisis, the 2001 Enron Bankruptcy, and the 2002 WorldCom bankruptcy? None at all? Predominantly?
- What evidence is there that "outliers" are "created by people who don't believe in outliers"? Has the author studied this real-time, or can he give some sort of historical evidence supporting this claim? Can a collection of people doing trading on a "assumption of normality" actually give results that are "non-normal"? How would one study this phenomenon? It seems the author is making a prediction here. But from dialog throughout the book, he ridicules the attempts to make predictions on human financial behavior.
There are many more outrageous claims that would add to this list, but space restricts this reviewer from going any further. To substantiate the claims that the author is making in this book would swell its pages to number in the thousands. It is a tiresome collection of ranting and ridicule, and adds nothing to the debate on the efficacy of quantitative finance. From working in financial modeling, this reviewer has always encountered extreme skepticism regarding mathematical modeling on the part of senior management. But these examples are purely anecdotal, and it would take many years to show that this is widespread, or that the converse is true.
If one humble lesson could be taken from reading this book it is that the financial markets of the twenty-first century rattle and intimidate some people, even seasoned traders and financial professionals. Yes, there are complicated mathematical constructions that are employed to describe financial markets and that are used to trade securities. But this reviewer looks forward to more mathematics in finance, not less, in the years ahead. Even better, and this is certainly on the horizon, is a situation where the commonsense of human financial dealings is completed automated into the technology used to implement financial transactions.
 A lot of trouble, but some useful insight November 2, 2009
Aaron C. Brown (New York, New York United States)
2 out of 2 found this review helpful
I agree with the complaints about repetitiveness and poor writing, but it is possible to understand this book. Most poor writing springs from unclear thinking, it is usually not worth deciphering. In this case I blame passion and unfamiliarity with English. If you eliminate all adverbs, ignore everything splitting infinitives, assume prepositions were chosen randomly, recast all sentences into present tense, active voice, indicative mood (the author is very fond of the inverted pluperfect subjunctive, perhaps from reading a lot of 19th century English poetry or conversing with Yoda) and eliminate irrelevant words borrowed from clichés, the book makes sense. For example:
"It is not fanatically expected that those pros who bring advanced analytics into the fold of practice would believe that the adopted models have a high chance of igniting trouble down the road. Rather, they would be assumed to be hopeful about the possible gains to be obtained by pledging allegiance to the math, whether in the shape of better prices, improved hedges, or more accurate risk measurements (the exception here would be those situations where financiers are forced by regulators to embrace a particular quantitative construct, the foundations of which they agitatedly distrust and which side effects they massively fear)."
Means simply:
"Quants do not build models to cause trouble. They hope models improve pricing, hedging and risk management. Sometimes bad models are imposed by regulators."
I understand most readers will not go through the trouble of decoding the prose. If they do, however, they will find there are some original points here, different from Taleb and Derman. They will also find junk. Triana constructs several straw man arguments, then loses to them ungraciously, heaping sarcasm rather than admitting defeat. I disagree with those reviewers who praised his views on Black-Scholes-Merton and Value-at-Risk, those views are deeply misinformed. One of his basic errors, repeated frequently, is to claim the goal of risk management is to predict and prevent disasters. People who guess the future and people who fear failure are the enemies of risk managers. Risk management means trying to prepare for anything that might happen, not guessing the future nor insuring no bad things ever happen. Institutions with good risk management fail often and fail fast, institutions with bad risk management fail only once.
The book's original contribution is to defend traditional corporate finance, as practiced in the United States from about 1910 to 1970. Triana is deeply reactionary. His only similarity to the revolutionaries and technocrats he quotes is dislike of current practice. Taleb wants to throw away prediction and measurement and face the unpredictable future with elegance. Derman wants us to understand the limits of models, to continue on our present course but with more humility and broader vision. Triana wants to go back to a simpler time when hands-on managers used simple math and no theory. There is a strong religious streak in this book, on the "may the force be with you" level.
Few people have less sympathy for this view than I do, but I still found it a useful and thought-provoking argument. I cannot recommend this book for general readers, but if you are very interested in this stuff and have the patience to wade through the style and repetition, you will learn things from it.
 A pithy, passionate polemic October 5, 2009
Rolf Dobelli (Switzerland)
This is a passionate attack on quantitative financial theory and its influence on business schools and the managers of financial institutions. Financial theorists, Pablo Triana says, are like ornithologists whose birdbrained formulas can't even come close to approximating the experience of flight. If you have maintained a regular acquaintance with advances in the financial markets, for example, by reading newspapers, you may already be familiar with Triana's analysis. He relies heavily on the ideas of Nassim Taleb and Emanuel Derman, who explain that people who have experienced improbable events overestimate the chance that such events will recur, while others underestimate it. In this rambling overview, Triana also refers to some of his own previous analyses. He presents a forceful summary of the problems with mathematical economic models. getAbstract finds that he offers good and valuable insights, though not necessarily innovative ones, and recommends his book to investors, financial analysts and thick-skinned economists.
Another shrill rant against models of financial products September 24, 2009
Richard (USA)
0 out of 1 found this review helpful
The author seeks to blame mathematical models for the most recent financial crisis. He never gives an example of such a model or how it failed or how it caused the crisis. He doesn't distinguish between a real model and hokum disguised as mathematics. Instead, he misrepresents facts and jumps to bogus conclusions.
Showing reviews 1-5 of 15
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