An Engine, Not a Camera: How Financial Models Shape Markets

Автор

Donald MacKenzie

Год

2006

Страниц

389

ISBN

ISBN10:0262134608

Издатель

The MIT Press

Описание:

MacKenzie has written a wonderful and brilliant book on a very complex set of issues; the development of mathematical finance theory. He has managed to take some very complex ideas and place them in highly readable and understandable ways and in addition places you in the midst of the process and the people as it has evolved over the past fifty years.

He starts with a discussion of the commodity exchanges. The point he makes is that the exchanges could exist only with the railroad and standards, inspected wheat and corn, so that one no longer worried about a specific bushel of wheat or corn from a specific farmer, but only about the property rights to a bushel, no matter where it came from. Once that existed the whole process was off and running.

He then takes the reader through the evolution of the CAPM model with Modigliani and Miller. He adds a bit of the Samuelson saga and the growing difference between MIT and Chicago schools. Having been on the edge of that set of discussions he does a splendid job.

These observations of the schools and personalities should be exceptionally germane to the current environment which is dominated by the Harvard types who filtered through MIT. After all, Larry Summers was MIT undergrad and Harvard grad. Bernake is MIT grad. The author lends great credibility and human feeling for these characters while ensuring the understanding of the new principles developed.

He then proceeds through stock options and the Black-Scholes work, and then takes you into the pits of traders and then through the various falls that occurred over the years.

This is not a book for understanding finance. It was not intended for that. This is, however, a must book for understanding the mind-set which got us to where we are now.

There were tons of good intentions but a lack of real world reality. There is a clear understanding that the models be accepted not that they predict the actual. Like economists generally, these finance type economists develop their models in a manner which is then antithesis of engineers.

Engineers are all too often introduced to their trade by being shown examples of failure. Most engineers remember the film of the collapse of the Tacoma Narrows Bridge due to inherent instabilities in its design. Then they are told that they should never allow that to happen again. Thus, engineers over design and always look for failure modes.

These financial economists, as demonstrated by the author, are driven by concepts and theories and are devoid of any reality. Thus, the never ending collapses are inevitable with such mind sets. This book is a great lesson for the future as well as the present.

An Engine, Not a Camera: How Financial Models Shape Markets

Описание:

Похожие книги