QuoteOriginally posted by: trademasterI have read more pros than cons in this thread. The fact is that finance is not even a science. Some may call it pseudo-science which is again not a science. Finance is not a premise that one can inject untested, questionable, scientific theories/models and disregard subjective judgements. One such theory is the BSM theory, which mathematically very sophisticated-looking, that must have been called crackpot rigor and that one must always be on guard against it.I'd like to close this thread with the following"There is perhaps no beguilement more insidious and dangerous than an elaborate and elegant mathematical process built upon unfortified premises" - Thomas C. Chamberlain, Geologist (1899)Some might argue that finance and economics can never be a proper science because of science really can't handle complex adaptive systems, especially systems more complex than the scientists themselves. Science only works for simple systems like physics.Although one could replace BSM with something else, that something else is no more likely to be correct and just as likely to fail as BSM. In fact, it is worse than that because any replacement for BSM will induce changes in how market participants act. Those participants will push into the profitable little corners of the new theory and apply ever greater levels of leverage were the theory claims no risk exists. But those very acts will change the statistical distribution and violate assumptions underlying the new theory as well as destabilize the financial systems built on the new theory. Thus any theory will induce it's own failure because unlike physics, the arrow of causality is reversed. In physics, observed behaviors lead to theories. In finance and economics, theories lead to behaviors.

QuoteOriginally posted by: trademasterQuoteOriginally posted by: daveangelIts a free country on Wilmott. But thanks for allowing me to say what I wish....What makes you think that I assumed you were a male ? You really ought to stop projecting.You know what? You're simply a jealous old man! The moment i wrote down the household names like Taleb, Derman, Ayache,... you jumped at them and called them pseudo this and that. I have read your posts and I don't think you are man enough and knowledged enough to debate anything. So you ought to stop projecting yourself as a man with knowledge. The moment you look down on me or anybody, you belittle yourself.I don't know which house you live in, but in my house Taleb, Derman and Ayache mean nothing to anyone else except me. Projection

QuoteOriginally posted by: Traden4Alpha[lthough one could replace BSM with something else...It's already done BTW. Even porfolios of vanilla stock or FX options are usually marked with a version of Dupire od Heston, although in some houses it's still BS. Marking exotics or IR options with BS is just nonsense.

I keep thinking that I am going to ignore this thread as it is a momenumental waste of time. But then it is a bit like a sore - the difference is that other certain people are picking it at, and other are oozing the pus.

QuoteOriginally posted by: rmaxI keep thinking that I am going to ignore this thread as it is a momenumental waste of time. But then it is a bit like a sore - the difference is that other certain people are picking it at, and other are oozing the pus.you are in now.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: GamalQuoteOriginally posted by: Traden4Alpha It's the discrepancies among models that lead some to think something is over-priced whilst others think in under-priced.It's why trades exist.Exactly! Standardization is the enemy of liquidity! Correct, standardization drives a marginal cost regime - in a comptetive arena marginal cost have a tendency to go to zero.

BSM "theory" offers a way to make a market a "fair game". It is based on the trick to replicate an option with a pair of two things with different numeraires.

QuoteOriginally posted by: exneratunriskBSM "theory" .... is based on the trick to replicate an option with a pair of two things with different numeraires.What? The trick? Are you making a joke?

QuoteOriginally posted by: trademasterQuoteOriginally posted by: exneratunriskBSM "theory" .... is based on the trick to replicate an option with a pair of two things with different numeraires.What? The trick? Are you making a joke?Oh dear.

QuoteOriginally posted by: rmaxQuoteOriginally posted by: trademasterQuoteOriginally posted by: exneratunriskBSM "theory" .... is based on the trick to replicate an option with a pair of two things with different numeraires.What? The trick? Are you making a joke?Oh dear.Yes. You know those wily Austrian philosophers with their bags of epistemological tricks!

Pooh, Austrian philosophers... French philosophers! Derrida, Merleau-Ponty, Foucault, Lyotard, Deleuze, Baudriillard... To be honest I don't know what they exactly did but how it sounds!

QuoteOriginally posted by: GamalPooh, Austrian philosophers... French philosophers! Derrida, Merleau-Ponty, Foucault, Lyotard, Deleuze, Baudriillard... To be honest I don't know what they exactly did but how it sounds!How it sounds...Like a gentle rain in Provence? Like the crunch of a good Sachertorte accompanied by a cup of strong Viennese coffee?Or maybe you mean to Russian ears.But look at your avatar. If you had the occassion to learn French, you would enjoy this poem.Un Coup de Dés Jamais N'Abolira Le Hasard

QuoteOriginally posted by: trademasterQuoteOriginally posted by: exneratunriskBSM "theory" .... is based on the trick to replicate an option with a pair of two things with different numeraires.What? The trick? Are you making a joke?However you want to call it, it is the "cancellation" of up and down probabilities by a probability measure. BTW, there are not so few mathrmatical "tricks" that motivate for "theories" ... one is: taking the continuum hypotethis as given. If you find "trick" negative, you might have better words .... A joke is, IMO, to mistake a model and its representation (the BSM formula, .....). No. I am not kidding ...

QuoteOriginally posted by: trackstarQuoteOriginally posted by: rmaxQuoteOriginally posted by: trademasterQuoteOriginally posted by: exneratunriskBSM "theory" .... is based on the trick to replicate an option with a pair of two things with different numeraires.What? The trick? Are you making a joke?Oh dear.Yes. You know those wily Austrian philosophers with their bags of epistemological tricks!About Austrianism in economics

QuoteOriginally posted by: exneratunriskBSM "theory" .... is based on the trick to replicate an option with a pair of two things with different numeraires.Yes. You know those wily Austrian philosophers with their bags of epistemological tricks!So if i'm not mistaken, you're saying BSM theory (aka risk-neutral pricing measure or approach) is an epistemological "trick". If yes, you're contradicted yourself because epistemic means subjective, not risk-neutral (which disregards personal preferences). I think you seem to be in favour of an epistemic/subjective pricing theory. If you are, we can discuss on this because subjective probability has been a hot topic for a while now. Many ppl believe subjective probability is closer to reality than risk-neutral probability.