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.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.Am I? (rather no, I believe in the importance of "knowledge how" (not only "knowledge that")) - as a (algorithmic) mathematician I am an Ani-Popperian. Provocatively speaking, mathematics, a technology, cannot be "falsified". As a technology it is allowed to use "tricks". But this is philosophical quibbling (BTW, I am speculative realist). More important, IMO: theories need models and models, intending to explain real behavior, often change it. This is what BSM does - and therefore I am pro it (but against its naive usage).

QuoteOriginally posted by: trademaster Many ppl believe subjective probability is closer to reality than risk-neutral probability.what is that supposed to mean ?

QuoteOriginally posted by: trackstarHow it sounds...Like a gentle rain in Provence? Like the crunch of a good Sachertorte accompanied by a cup of strong Viennese coffee?No, Sachertorte doesn't do. Vienna itself fits but has a terrible downside - they speak German in Vienna. German nonsense is attractive as well but it's still German, doesn't sound. Only French nonsense. Just listen:La philosophie n?est pas communicative, pas plus que contemplative ou réflexive : elle est créatrice ou même révolutionnaire, par nature, en tant qu?elle ne cesse de créer de nouveaux concepts. La seule condition est qu?ils aient une nécessité, mais aussi une étrangeté, et ils les ont dans la mesure où ils répondent à de vrais problèmes. Le concept, c?est ce qui empêche la pensée d?être une simple opinion, un avis, une discussion, un bavardage. Tout concept est un paradoxe, forcément? Like a gentle rain in Provence.

QuoteOriginally posted by: pcaspersQuoteOriginally posted by: trademaster Many ppl believe subjective probability is closer to reality than risk-neutral probability.what is that supposed to mean ?Early works on subjective probability by Bruno de Finetti (1937). PC Fishburn, "A general theory of subjective probabilities and expected utilities", The Annals of Mathematical Statistics, 1969.Jaakko Hintikka, "Unknown Probabilities, Bayesianism, and de Finetti's Representation Theorem", Proceedings of the Biennial Meeting of the Philosophy of Science Association, Vol. 1970 (1970), pp. 325-341.Articles by Jens Carsten Jackwerth and his predecessor Rubinstein on subjective probability and option pricing: http://papers.ssrn.com/sol3/papers.cfm? ... bility.pdf and references therein.

QuoteOriginally posted by: trademasterQuoteOriginally posted by: pcaspersQuoteOriginally posted by: trademaster Many ppl believe subjective probability is closer to reality than risk-neutral probability.what is that supposed to mean ?Early works on subjective probability by Bruno de Finetti (1937). PC Fishburn, "A general theory of subjective probabilities and expected utilities", The Annals of Mathematical Statistics, 1969.Jaakko Hintikka, "Unknown Probabilities, Bayesianism, and de Finetti's Representation Theorem", Proceedings of the Biennial Meeting of the Philosophy of Science Association, Vol. 1970 (1970), pp. 325-341.Articles by Jens Carsten Jackwerth and his predecessor Rubinstein on subjective probability and option pricing: http://papers.ssrn.com/sol3/papers.cfm? ... bility.pdf and references therein.yes, but what does it have to do with risk neutral probability ?

... and I always like what Chamberlain said"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)Guys, say whatever you want to say. Time is an ultimate measure of what is right or wrong!

QuoteOriginally posted by: pcaspersyes, but what does it have to do with risk neutral probability ?Does any vanilla trader quote call/put prices and say they are risk-neutral? Or can you tell if call/put quotes are risk-neutral?

QuoteOriginally posted by: trademaster... and I always like what Chamberlain said"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)Guys, say whatever you want to say. Time is an ultimate measure of what is right or wrong!It is interesting that Mr Chamberlain uses the word "perhaps" in this quote of his that you like to bandy about. And don't you mean that "time is the ultimate measure" ? I am sure that it isn't. Hypothesis, prediction, experimentation, repetition - these are the tools of science.

risk neutral probability is a purely technical tool, you can not ask if the distribution matches your expectation or is realistic (it is not and does not claim to be). To say that a price is risk neutral is similar to saying a price is crank nicholson or monte carlo. and there are a lot of very different pricing measures, all yielding the same price.

QuoteOriginally posted by: trademaster Time is an ultimate measure of what is right or wrong!What do you mean by Time?What do you mean by UltimateWhat do you mean by MeasureWhat do you mean by RightWhat do you mean by WrongOr are you saying in the long run we are all dead?

QuoteOriginally posted by: rmax[What do you mean by RightWhat do you mean by Wrong?Maybe a Scottish motive...What is Right, and What is Wrang, by the law, by the law?What is Right and what is Wrang by the law?What is Right, and what is Wrang?A weak arm and a strang,A short sword, and a lang, for to draw.Good for today.

QuoteOriginally posted by: daveangel And don't you mean that "time is the ultimate measure" ? I am sure that it isn't. Hypothesis, prediction, experimentation, repetition - these are the tools of science.You seem so sure of what is science and what not. Let me ask you: Is Voodoo a science?

QuoteOriginally posted by: trademasterQuoteOriginally posted by: daveangel And don't you mean that "time is the ultimate measure" ? I am sure that it isn't. Hypothesis, prediction, experimentation, repetition - these are the tools of science.You seem so sure of what is science and what not. Let me ask you: Is Voodoo a science?Let me ask you this .. do you always quote from sources that you have just read like "The failure of risk management by Douglas Hubbard" who provided you the Chamberlain quote and the "crackpot rigor" line ?

QuoteOriginally posted by: pcaspersrisk neutral probability is a purely technical tool, you can not ask if the distribution matches your expectation or is realistic (it is not and does not claim to be). To say that a price is risk neutral is similar to saying a price is crank nicholson or monte carlo. and there are a lot of very different pricing measures, all yielding the same price."God doesn't play dice" - Albert Einstein. Does this apply to option pricing? If it does, risk-neutral probability does not exist.

QuoteOriginally posted by: daveangelQuoteOriginally posted by: trademasterQuoteOriginally posted by: daveangel And don't you mean that "time is the ultimate measure" ? I am sure that it isn't. Hypothesis, prediction, experimentation, repetition - these are the tools of science.You seem so sure of what is science and what not. Let me ask you: Is Voodoo a science?Let me ask you this .. do you always quote from sources that you have just read like "The failure of risk management by Douglas Hubbard" who provided you the Chamberlain quote and the "crackpot rigor" line ?Hey old grumpy daveangel, don't get jealous again or you will get a heart attack! I shall call you daveevil from now on.