“We’re Way Past Humpty Dumpty”

The most basic link in finance is that between risk and reward. Just like alchemists who once sought a path to gold from lead, a great deal of modern finance was built around finding a shortcut between them. Discovering the great asymmetry where risks would be low but rewards sky high was the Holy Grail of later 20th century mathematics. If you studied advanced math or economics (same thing, unfortunately) at an Ivy League school at that time chances were that at the end of your college career was one on Wall Street.
It was almost like a series of Nigerian princes had descended upon the financial districts of each of the world’s great money centers, promising each and every bank (really ‘banks’) as much wealth as they could possibly want should they only take a small risk. The most famous of them was Robert Merton and Myron Scholes, who got involved with LTCM, and though they nearly brought down the financial world in 1997 and 1998, that was merely the re-imposition of risk/reward that had never really been altered.
That was one of the great ironies about LTCM. It introduced math in a way that actually preyed upon biases. The allure of math is its scientific senses, the way in which it is pitched under objectivity, as if great formulas and complex equations can see the future because there they have no emotion or individuality. In truth, this financial math is sleight of hand, a magic trick performed by the best of illusionists.

This post was published at Zero Hedge on Feb 5, 2017.

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