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Chukchi
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New Book - The Blank Swan: The End of Probability by Elie Ayache

April 23rd, 2010, 5:12 pm

The Blank Swan: The End of Probabilityby Elie AyacheHardcover: 496 pages Publisher: Wiley (June 2010) ISBN-10: 0470725222 FinMath.com
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crmorcom
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New Book - The Blank Swan: The End of Probability by Elie Ayache

April 23rd, 2010, 5:38 pm

A very clever title, but the publisher's blurb is not very explanatory, and I'm not convinced by the first few pages! I will be interested to read a few careful reviews before parting with my money.
 
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trackstar
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 17th, 2010, 3:12 pm

I have been reading this book and taking several very interesting detours this summer because of it.Will be posting some material in trackstar's blog in the OT in a few days and will cross post here.
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trackstar
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 18th, 2010, 5:08 pm

As promised and posted in my blog. I will watch this thread, but henceforth, I will only be posting there, rather than perpetual beta replication. trackstar's blog trackstar's blog - August 18The Blank Swan - Ripples in the Market Stream"October 19th 1987 was a day of huge change for the global finance industry. On this day the stock market crashed, the Nobel Prize winning Black-Scholes formula failed and volatility smiles were born, and on this day Elie Ayache began his career, on the trading floor of the French Futures and Options Exchange. Experts everywhere sought to find a model for this event, and ways to simulate it in order to avoid a recurrence in the future, but the one thing that struck Elie that day was the belief that what actually happened on 19th October 1987 is simply non-reproducible outside 19th October 1987 - you cannot reduce it to a chain of causes and effects, or even to a random generator, that can then be reproduced or represented in a theoretical framework.The Blank Swan is Elie's highly original treatise on the financial markets - presenting a totally revolutionary rethinking of derivative pricing and technology. It is not a diatribe against Nassim Taleb's The Black Swan, but criticises the whole background or framework of predictable and unpredictable events - white and black swans alike -, i.e. the very category of prediction."- From the description of The Blank Swan from Wiley**People are curious about this book, Here and There, and now that I have ascertained that it is indeed a Blank Swan, not a Black One, I thought that I would share some observations with you. I have been reading, stopping, rereading, and travelling along several pathways in learning and understanding Elie's concepts and arguments this summer. It is a dense, tough, and I would say brilliant piece of work, and I recommend the book highly, if you are the type of reader who makes a commitment and follows through. If you are only interested in how to get rich trading vol and you need someone else's answers *right now*, then perhaps you should go back to your blue screen with your blank stare. Elie offers us some very interesting signals, but we will have to develop the trading strategies ourselves. ***Let's start with Elie's own description of the work, so we are not entering the realm of second-order implied philosophy quite so quickly. "The current crisis has led us to a conceptual impasse regarding the financial market. No prediction model can apply to the market, (Taleb), would say, and derivatives, which are the product of the most sophisticated brand of financial mathematics and engineering, should be banned. I claim that the way of the market falls outside probability and prediction, and for this reason it should be preserved.Probability has to be discarded and a new category has to emerge instead, which will mediate contingency. This new category is something called "price." While probability mediates abstract possibilities, or pure metaphysical fictions, price mediates concrete and real contingencies, which typically take place in a market.Philosophers and financial academics alike seem to be missing the point. Philosophers of contingency and the event are for the most part of leftist obedience. They believe that the crisis signals the end of capitalism and Wall Street. In fact, the market has nothing to do with Wall Street or with the investment banks. Market-making is a creative activity. The market is a category of thought that is independent of ideology. It replaces probability altogether and discarding the market, like the philosophers of radical change claim we should do, is like discarding probability!As for financial academics, they aren't in the least interested in learning about the onto-genesis of the market, or the very investigation that I have attempted in this book. They deal with prices and values as if they were numbers and mathematical functions. How can they listen to someone who claims that the price only looks like a number but doesn't "compute" like one and that one needs to very carefully examine a long thread of philosophy of the event and of contingency, extending from Bergson to Deleuze to Badiou and Meillassoux, in order to understand what's inside a price ?"**There is fairly strong consensus around Wilmott on the shortcomings of the financial academics, so let's dig a little deeper into the Geneaology of Elie's Morals. In addition to the philosophers that he has mentioned above, I will include others that have received significant attention in the book. In some cases, I have substantial familiarity (Deleuze, Guattari, Derrida) and others were new to me (I had not heard of Meillassoux and had minimal contact with Badiou, until now). Continental philosophy is undergoing yet another revolution and unless you suivez la piste de philosophie directement en France, it can be years before some of the best work is translated and reaches the Anglophone audience. Rather than a formal book review, I will offer signs and guideposts. This will be more helpful to those interested in the book, I think, and will prevent the proliferation of flawed derivatives. When a philosopher has passed on to the next world, we have only our own minds and perhaps a selection of dedicated experts to rely on for interpretation. But Elie is very much alive and hopefully he will visit this thread, if and when there are serious questions and comments. "(The) simplest ideas are sometimes the most revolutionary and, consequently, the most difficult ones. Here is the simple idea that my whole book revolves around: If contingency is truly to be considered absolute (Meillassoux), then it should no longer be thought in terms of possibilities; what, in probability theory, we call "states of the world," or in metaphysics, "possible worlds". It should be thought absolutely, independently of any "system of coordinates" represented in possibility."**So, on to some contingencies, with my Being, in Time. - TS
Last edited by trackstar on August 17th, 2010, 10:00 pm, edited 1 time in total.
 
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Traden4Alpha
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 19th, 2010, 12:55 pm

Nice! I've read some of Ayache's writing but not this book and would not claim to understand all his finer points. Yet I suspect that I agree with much of what he says, at least with regard to the deeper errors in the prevailing models used for the markets. In particular:1) Stochastic models contain deeply embedded assumptions that fail egregiously. Although markets certainly contain pseudorandom events (e.g., a flood ruins a harvest, a miner strikes rich vein, an incompetent leader makes a injudicious statement) that rule the micromovements of the market, the larger movements over larger timescales contain much larger near-deterministic effects. Extremely unexpected events (black swans) occur too often. This phenomenon is worse that Taleb states when he shows how the rarity of the events makes them hard to analyze and destabilizes our estimation and calibration processes. The deeper problem lurks in the nature of human risk perceptions, reward incentives, and hubristic modeling practices. These factors literally discount the risks too much, justify extreme bets with extreme leverage and thereby induce near-impossible events with near-certain probability.2) The long-term, discounted, expected future cashflows of an instrument only provides a useful estimate of the price under some conditions (and fails to provide a strong estimate under at least three conditions). First, during times of financial stress, the price of an instrument becomes a function of the short-term expected cashflows of seller and the aggregate availability of capital. Second, during times of speculation, the price of an instrument becomes a function of the expected cashflows of buyers and their ability to pour cash into the market's darling du jour. Third, the model ignores shared systemic errors in the belief systems of participants.3) IFRS/GAAP poorly handles both probabilistic, contingent, and conditional events by attempting to reduce them to a single-valued variable (which is why I was so vehement/incontinent in the sqrt/arctan/positron threads). Recognized revenues, costs, assets, and liabilities all represent a kind of forecast and we all know that the only certainty in a forecast is the certainty that it is wrong. These accounting standards also use a flawed unit-of-analysis that both permits fraud (off-balance sheet structures that hide financial problems) and hides serious systemic risks (cascading failures in the larger system). Although one can draw a nice little boundary around the firm, that boundary is highly permeable and subject to malicious choices. The true accounting state inside the firm becomes a strong function of events outside the firm. We can pretend that a balance sheet stands in isolation as a reflection of that entity's resources and obligations, but so many outside factors affect the true outcome that we'd best not bet too much in the accuracy of the accounting statement.
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farmer
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 19th, 2010, 3:33 pm

Those who understand something clearly can explain it in a paragraph. Those who can't understand something - Ayache and Taleb - require an entire book to plot their wanderings in the forest.
 
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crmorcom
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 19th, 2010, 4:05 pm

Having just read the first 8 pages on Amazon, I must say I agree with Farmer. I'm almost tempted to buy it just to see if the rest is as incoherent as the introduction but don't quite think I want to blow $29.16 on the experience. I think I may prefer to go back to my blue screen with my blank stare.
 
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Traden4Alpha
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 20th, 2010, 1:14 am

QuoteOriginally posted by: farmerThose who understand something clearly can explain it in a paragraph. Those who can't understand something - Ayache and Taleb - require an entire book to plot their wanderings in the forest.That's only true for trivial topics in which the gulf between the audience's state of knowledge and the author's intended destination is a mere paragraph. (I will grant you that a good author can hook it's audience in a single paragraph even if the topic requires a entire book to fully convey).I'd say that Ayache faces a rather serious challenge. He's trying to talk to a group of people who have spent their entire lives being lauded for how much they know (A+ report cards, 1600 SAT, honors grad from an Ivy league school, big salary, etc.) and tell them that they know far less than they think they know. Worse, he's trying to replace an edifice of thought which does provide seemingly certain answers (even if they are dangerously wrong) with something that provides only the cold comfort of uncertainty.
 
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frenchX
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 20th, 2010, 2:31 am

If you like very much Elie Ayache, I advise you to read this book (by Michel Bitbol, the french expert of realism). Unfortunately it's in french at the moment I think Théorie quantique et sciences humainesThe book is mainly focusing about philosophy of quantum mechanics but there also inside a chapter by Elie Ayache called "L?événement du marché, ou la nécessité de l?ascension méta-contextuelle " (the market event or the need of a metacontextual anscension). Sorry if it's only in french at the moment but I know some of you who can understand french quite well EDIT: I also suggest you to have a look on his papers Ayache's paper selection i advise you to read "I'm a creator" the last tackle up to date to Taleb and Collector
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farmer
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 20th, 2010, 11:44 am

QuoteOriginally posted by: Traden4AlphaThat's only true for trivial topics in which the gulf between the audience's state of knowledge and the author's intended destination is a mere paragraph.Then Ayache doesn't properly understand the destination. The audience does not need to tour a whole city to learn something like German cities are cleaner than Italian cities. His main point is probably a simple and abstract one. He distracts the audience with a lot of page filler.Ayache, if you read this, you know you made a lot of page filler. You wanted to write a book, and you wanted to offer more than just the main point. You wanted to take people on a pointless tour of your city. Your mother must have told you your writing is very enjoyable.
 
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Traden4Alpha
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 20th, 2010, 12:05 pm

QuoteOriginally posted by: farmerQuoteOriginally posted by: Traden4AlphaThat's only true for trivial topics in which the gulf between the audience's state of knowledge and the author's intended destination is a mere paragraph.Then Ayache doesn't properly understand the destination. The audience does not need to tour a whole city to learn something like German cities are cleaner than Italian cities. His main point is probably a simple and abstract one. He distracts the audience with a lot of page filler.Ayache, if you read this, you know you made a lot of page filler. You wanted to write a book, and you wanted to offer more than just the main point. You wanted to take people on a pointless tour of your city. Your mother must have told you your writing is very enjoyable.I'd say that, by this argument, most philosophers don't understand the destination. Or should we say that most readers don't understand the journey.Part of me agrees with you, farmer, that the density of Ayache's writings does a disservice to his presumed goal of reaching (and teaching) a broader audience who should listen to his ideas in the context of quantitative finance, market regulation, and economics. Yet I don't think we should confuse style with substance and would hope that we could discuss content, rather than form.
 
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crmorcom
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 20th, 2010, 1:22 pm

QuoteOriginally posted by: Traden4AlphaPart of me agrees with you, farmer, that the density of Ayache's writings does a disservice to his presumed goal of reaching (and teaching) a broader audience who should listen to his ideas in the context of quantitative finance, market regulation, and economics. Yet I don't think we should confuse style with substance and would hope that we could discuss content, rather than form.Though one cannot separate them reliably, the form does matter for the content - certainly at the extremes. Reading the blurb or the 8 pages that Amazon reproduces, it is virtually impossible to understand what the point of the book is. It has a level of form obscuring function that I have almost never seen before. That is a problem - particularly if Ayache expects me to pay $29.16 and spend hours of my time reading 496 pages.So, a question for you: in one or two paragraphs, what do you understand the content to be? And what, in intelligibly concrete terms, does Ayache add to the debate about economics?
 
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trackstar
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 20th, 2010, 2:47 pm

A few comments, although I realize that the questions are directed at Traden.1) Part of the issue for some people may be their normal reading style. If you are used to novels, history, and even papers on risk management and finance, you may be accustomed to starting at the beginning and going right through to the end in one session, or a few days at the most. Once you get into philosophy or more complex texts in math, science, or finance, this is not necessarily a reasonable approach. You will read a few pages, get inspired (or confused, or mad!), go away, think, come back, read some more. As I said in my original post, a book like The Blank Swan does require a commitment and understandably, you would like to feel that your effort will be worthwhile. But over all my years of reading, some of the books that challenged or irritated me the most in the beginning, held my attention, and turned out to be some of the best books I have read.2) Related to that - again reiterating my previous post - in the many-branched tree of philosophy, there is an elaborate genealogy of thinkers and writers. It is not a firm requirement that you have read deeply in every area in order to enjoy a book like The Blank Swan, but your experience will be greatly enhanced if you either have some familiarity (with the group of philosophers that Elie cites extensively) from your past reading, or you take the time to supplement your engagement with this book by looking into some of the philosophers mentioned in it. This can be quite time consuming, but that is where the rubber hits the road, in my opinion.3) Your fixation on the price of the book is amusing to me; at first I thought you were joking. If I go out to lunch around here and, besides an entree, I order an appetizer, a dessert, and a cappuccino, it will come to more than $30, before the tip for the waiter, (who is probably a struggling artist, poet, or philosopher...!) But perhaps you are a student and we all sympathize with the budget constraints in that situation. When I was an undergrad, I shopped for clothes at Army-Navy and Vintage stores and spent most of my "allowance" money on books. I also used the university library a lot (which was vast) and requested books on interlibrary loan, as occasionally needed. 4) Over the weekend I will be posting some comments about a select group of philosophers who are relevant to Elie's book. I am somewhat tempted to create a little presentation for you too: Bullet Points to the Blank Swan. We'll see.
Last edited by trackstar on August 19th, 2010, 10:00 pm, edited 1 time in total.
 
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crmorcom
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 20th, 2010, 4:23 pm

My question was not only directed at Traden - thank you for your reply.1) I completely understand what you mean. I am not expecting or desiring a linear approach. But when I read, say, a very complex result in mathematics, even if the proof is very non-linear and requires many digressions into (at first) apparently unrelated fields, I still have some idea of what the punchline is before I start. In the case of the Blank Swan, the blurb and reviews and discussion here so far convey to me no idea whatsoever what the book achieves. Given that, I'm reluctant to spend hours wading through Ayache's prose and, yes, I would rather spend my money on an appetizer and an entree!2) As above. The value of citation or allusion is to compress or distil arguments so that one doesn't have to rehash them all over again (in science/non-fiction) or to produce an aesthetic resonance (in the arts). Just knowing which philosophers Ayache refers to does not, in itself, tell me anything about the value that his text adds. If I have been convinced that his ideas are interesting, and if his references are important to his reasoning, then I would definitely want to follow them up; but not before.3) My fixation on the price was ironic: a certain amount of his verbiage seems to hint at the contextuality of price and markets. I would have thought that the idea that the market for (and price of) his own ideas would be interesting would be something which would seem quite natural to the author. But that's a guess, since I'm entirely unsure what he means by that Your unnumbered point is the most interesting to me. Please do post some bullet points on the Blank Swan. I would love to read them. 4) is, in the context of the current discussion, of somewhat less immediate interest.
 
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spv205
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New Book - The Blank Swan: The End of Probability by Elie Ayache

August 21st, 2010, 8:39 am

I would second crmorcom. Please Trackstar can we have the content of Elie's writings without the form!
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