Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?

by Pablo Triana

LECTURING BIRDS ON FLYING For the past few decades, the financial world has often displayed an unreasonable willingness to believe that "the model is right, the market is wrong," in spite of the fact that these theoretical machinations were largely responsible for the stock market crash of 1987, the LTCM crisis of 1998, the credit crisis of 2008, and many other blow-ups, large and small. Why have both financial insiders (traders, risk managers, executives) and outsiders (academics, journalists, regulators, the public) consistently demonstrated a willingness to treat quantifications as gospel? Nassim Taleb first addressed the conflicts between theoretical and real finance in his technical treatise on options, Dynamic Hedging . Now, in Lecturing Birds on Flying , Pablo Triana offers a powerful indictment on the trustworthiness of financial theory, explaining—in jargon-free plain English—how malfunctions in these quantitative machines have wreaked havoc in our real world. Triana first analyzes the fundamental question of whether financial markets can in principle really be solved mathematically. He shows that the markets indeed cannot be tamed with equations, presenting a long and powerful list of obstacles to prove his maverick unlawful human actions rule the markets, unexpected and unimaginable events shape the markets, and historical data is not necessarily a trustworthy guide to the future of the markets. The author then examines the sources of origin of many prevalent theories and mathematical dictums. He details how the field of financial economics evolved from a descriptive discipline to an abstract one dedicated to technically concocting professors' own versions of how such a world should work. He goes on to explain how Wall Street and other financial centers became eager employers of scientists, and how scientists became eager employees of financial firms. Triana concludes with an in-depth discussion of the most significant historical episodes of theory-caused real-life market malaise, with a strong emphasis on the current credit crisis. In the end, Lecturing Birds on Flying calls for the radical substitution of good old-fashioned common sense in place of mathematical decision-making and the restoration to financial power of those who are completely unchained to the iron ball of classroom-obtained qualifications.

Genres: Finance, Business, Nonfiction, Economics

400 pages, Hardcover

First published January 1, 2009

Reviews

[Wes Devauld · Rating 2 out of 5]

This book is a roller-coaster of a read. Being that Pablo is not a native english writer it may be that a few of the problems with language should be overlooked; my difficulty is that the tome appears to be written by two different people. At times the arguments are very clear and concise, at others the writer comes off as a child using big words just to impress the adults. I often wondered if Pablo didn't take a thesaurus, and just grab the longest synonyms listed without understanding the subtlety of the different word. Was the best fit of language really "salubriousness" or Often these unnecessarily large works are placed next to each other, and I can't read "tumultuous tumultuousness", "disrupting disruption" or "reassuringly reassuring" without thinking that it is childlike. Furthermore, at times "amplifyingly", "widespreadly", "breakthroughness" or "nondauntlessly" are used to try and push across the author's point. Even if I could forgive the author for failing to be creative with the language, I can not forgive the editor or publisher simply because of how much I paid for this book.

Pablo is very passionate about the topic, and the book is very well researched. There are some enlightening stories about well known figures, and a couple of nuggets of insight. The main point of the argument is repeated more often than needed, and it is not a unique argument. Pablo reaches new lows with tearing apart the status quo of mathematics on wall street and business school education. At one point he even likens them to the Taliban, which I believe is a bit too far.

Finally, some of the arguments that are made in the book do not have credibility in their details. Subtle discrepancies between 'at most' or 'least', 'impossible' or 'improbable' and 'maximum losses' or 'most likely losses' break down the author's ability to keep the argument together. The underlying argument is still valid, but a good deal of the evidence is improperly presented, or just plain incorrect. This showcases the differences in writing style throughout the book, as in some locations Pablo is able to pull together the nouns and adjectives for a solid argument whereas in others the problems with the argument are so wrong that you can't help but wonder if they were jotted down while the author wasn't looking.

If you'd like to read about how mathematicians got it wrong on wall street, I would recommends Pablo's man-crush Taleb and his Fooled by Randomness. If you want to know more about the dirty side of Wall Street and how it continues to fail the average person I would recommend either Taibbi's Griftopia or Greising's Brokers, Bagmen and Moles

[Yasiru · Rating 1 out of 5]

It's hard to overstate just how bad this is. It trips over itself enough that you might think it should have been a much shorter pamphlet instead, but that's not it either. It's... fanfiction. Or rather fan-nonfiction. Anyone who's read Taleb will make note of this early on and it doesn't get better. It's unfortunate how Taleb, who does manage to compellingly present a decent criticism or two as payoff for putting up with his boorish prose, has taken up a policy of endorsing anyone who endorses him (there's this book and you might also be interested to read Taleb's senseless charges against Pinker in defence of Gladwell).

As for what Triana has to offer beyond this, it turns out to be worse than useless. Triana is an honest to goodness Luddite. This isn't a far-fetched label either- established fields of engineering rely on mathematical theory as much as financial engineering does, making the latter as legitimate as software engineering- if a level further abstracted from the world of rigid bodies or gears or switches. Admittedly financial technology deals with far more unknowns than conventional technology, but this means we need to be careful with our risk measures, not (as Triana seems seriously to suggest) abandon the machinery and rely on the vagaries of 'experience' entirely. This review contrasts Triana's position with other critics of modern quantitative finance and in doing so (though it's tone is far more patient than I believe the viewpoint deserves).

Interestingly, critics like Triana of the 'quantification of finance' who try to heap as much blame as they can on models risk overlooking the important insights behavioural economics has to offer in analysing crises. This is especially true when it comes to the present work's Luddite attitude.
The edifice of mathematical finance stands on the foundation of neoclassical economic theory. Taleb may have a point that we overlook whole swaths of the terrain of the risk landscape with model assumptions that are convenient or elegant, but this unmeasurable dimension of 'unknown unknowns' is not the only source for possible fatal error. It's also likely that the unbounded rationality of agents assumed in neoclassical economics is too strong a condition as robust results from the psychology suggest (see this paper for an analysis of the global financial crisis from this point of view), and it's clear from results on imperfect information in markets that stronger forms of the efficient market hypothesis just aren't that reasonable (see Justin Fox's Myth of the Rational Market for an excellent history of the idea).

Given all of these sources of error, continuing the engineering analogy, it seems modern finance does a fairly good job

[E · Rating 4 out of 5]

A pithy, passionate polemic

This is a passionate attack on quantitative financial theory and its influence on business schools and the managers of financial institutions. Financial theorists, Pablo Triana says, are like ornithologists whose birdbrained formulas can’t even come close to approximating the experience of flight. If you have maintained a regular acquaintance with advances in the financial markets, for example, by reading newspapers, you may already be familiar with Triana’s analysis. He relies heavily on the ideas of Nassim Taleb and Emanuel Derman, who explain that people who have experienced improbable events overestimate the chance that such events will recur, while others underestimate it. In this rambling overview, Triana also refers to some of his own previous analyses. He presents a forceful summary of the problems with mathematical economic models. getAbstract finds that he offers good and valuable insights, though not necessarily innovative ones, and recommends his book to investors, financial analysts and thick-skinned economists.

[Navneet Bhushan · Rating 2 out of 5]

Well the only good thing about the book if you have not read Taleb's books is the half part of the title. Lecturing birds on flight .. and to complete .. thinking the lecture improves their flight performance. Or something to that . Taleb calls it the Harvard-Soviet Illusion. I have used this part of the title in my presentations and workshops to stress on why and how theories and instructions based on theories are ineffective when it comes to nature and adaptability and response on ground situations. How does an actor works naturally in changing scenarios and situations is not driven by theory .. especially mathematical theory.

The book tries to stress that markets have their own natural ways and the mathematical theories are well .. artificial and unnatural plays.

Those who have read Taleb can potentially pass off this book.

Secondly the book is a boring read unlike Taleb style !

[Sean · Rating 2 out of 5]

The content isn't bad, but the writing is. It comes across like a college paper trying to eke out a few more sentences to meet the 20 page length requirement... the author sometimes repeats the same sentence in three or four different ways, and multiple times in the same chapter.

[Martin V · Rating 2 out of 5]

A second rate Nassim Taleb

[R Moba · Rating 3 out of 5]

A bit of a rant directed at the Black Scholes model. A little repetitive.

[Paul · Rating 3 out of 5]

A very useful companion volume to Nassim Taleb's BLACK SWAN, this book goes into great detail concerning the pitfalls of the market's over-reliance on abstract financial models in conducting its day-to-day trading. Great insights into some of the theoretical shenanigans, and non-grounded mathematics, which led to our recent economic near-collapse. Supposedly written for the lay person, which leads to a complaint: one would've hoped for a firmer editorial hand, to trim the text, avoid some repetition and clarify the occasionally gnarly prose.

[Matthew · Rating 3 out of 5]

Triana is essentially a Taleb disciple and derives most of his attitudes and thoughts from things that were originally said by Taleb in 'Fooled By Randomness' and/or 'The Black Swan'. His criticism of VaR is valuable, but his dry writing style is without question an obstacle against the reader's enjoyment of the book.

[Matthias Jørgensen · Rating 4 out of 5]

Has some very interesting parts - but gets quite repetitive, and a bit "too in-depth" on issues that are related, but not central, to the case at hand.

Enjoyable though, a good read if you enjoy finance books and haven't quite understood the basis for a critique of many of the models yet.

[David · Rating 2 out of 5]

A bit tiresome. Hero-worship of Nassim Taleb, sarcasm. Not much that's really original or thought through that I saw, though I admit I only read it spottily.

[Sebastian Perez Saaibi · Rating 1 out of 5]

I unfortunately read this book. It's sad and EXTREMELY poorly written.
Sad, sad, sad.