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The Blank Swan: The End of Probability
October 19th 1987 was a day of huge change for the global finance industry. On this day the stock market crashed, the Nobel Prize winning Black-Scholes formula failed and volatility smiles were born, and on this day Elie Ayache began his career, on the trading floor of the French Futures and Options Exchange.
Experts everywhere sought to find a model for this event, and ways to simulate it in order to avoid a recurrence in the future, but the one thing that struck Elie that day was the belief that what actually happened on 19th October 1987 is simply non reproducible outside 19th October 1987 - you cannot reduce it to a chain of causes and effects, or even to a random generator, that can then be reproduced or represented in a theoretical framework.
The Blank Swan is Elie's highly original treatise on the financial markets - presenting a totally revolutionary rethinking of derivative pricing and technology. It is not a diatribe against Nassim Taleb's The Black Swan, but criticises the whole background or framework of predictable and unpredictable events - white and black swans alike -, i.e. the very category of prediction.
In this revolutionary book, Elie redefines the components of the technology needed to price and trade derivatives. Most importantly, and drawing on a long tradition of philosophy of the event, from Henri Bergson, to Gilles Deleuze, to Alain Badiou, and on a recent brand of philosophy of contingency, embodied by the speculative materialism of Quentin Meillassoux, Elie redefines the market itself against the common perceptions of orthodox financial theory, general equilibrium theory and the sociology of finance.
This book will change the way that we think about derivatives and approach the market. If anything, derivatives should be renamed contingent claims, where contingency is now absolute and no longer derivative, and the market is just its medium. Also, the book establishes the missing link between quantitative modelling (no longer dependent on probability theory but on a novel brand of mathematics which Elie calls the mathematics of price) and the reality of the market.
Experts everywhere sought to find a model for this event, and ways to simulate it in order to avoid a recurrence in the future, but the one thing that struck Elie that day was the belief that what actually happened on 19th October 1987 is simply non reproducible outside 19th October 1987 - you cannot reduce it to a chain of causes and effects, or even to a random generator, that can then be reproduced or represented in a theoretical framework.
The Blank Swan is Elie's highly original treatise on the financial markets - presenting a totally revolutionary rethinking of derivative pricing and technology. It is not a diatribe against Nassim Taleb's The Black Swan, but criticises the whole background or framework of predictable and unpredictable events - white and black swans alike -, i.e. the very category of prediction.
In this revolutionary book, Elie redefines the components of the technology needed to price and trade derivatives. Most importantly, and drawing on a long tradition of philosophy of the event, from Henri Bergson, to Gilles Deleuze, to Alain Badiou, and on a recent brand of philosophy of contingency, embodied by the speculative materialism of Quentin Meillassoux, Elie redefines the market itself against the common perceptions of orthodox financial theory, general equilibrium theory and the sociology of finance.
This book will change the way that we think about derivatives and approach the market. If anything, derivatives should be renamed contingent claims, where contingency is now absolute and no longer derivative, and the market is just its medium. Also, the book establishes the missing link between quantitative modelling (no longer dependent on probability theory but on a novel brand of mathematics which Elie calls the mathematics of price) and the reality of the market.
496 pages, Hardcover
First published January 1, 2010
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343 people want to read
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Displaying 1 - 6 of 6 reviews
January 4, 2020
This is a monster of a book. It's difficult to read but not only because of its dense concepts. It's also difficult to read because Ayache could have used an editor. Ayache is for the most part clear, but it is not always clear to what he is saying. He lacks some of the basic organization he would need to create his own metaphorical system (such as how Delueze and Guattari used the concept of plateaus). Because of this, Ayache says the same thing over and over in different ways, trying to convey the concept correctly. This is tiresome because if he said it in another way he could have said it more directly.
I am not sure if he wrote a book before this one. If so, then this is an impressive work. Its dense, it's surprisingly clear, and its imaginative in how it utilizes some of its core metaphors (like "going to Sydney" or "Barton Fink") and for that reason it is amazing. I am not always sure if this is the most direct manner though. He starts off fairly heavy into philosophy but eventually departs this to highlight the manner in which one should understand derivatives.
The subject matter is mainly to challenge a kind of Newtonian thinking on the part of people believing that value is somehow ontological and reflected in part by price. This kind of representational thinking doesn't capture the dynamic nature of the Blank Swan.
Essentially, as a play on "Black Swan" Ayache speaks of a derivative that shifts the entire market. He doesn't talk about the probability of something coming into existence, rather that existence (and becoming) are made in the moment with each claim. The market maker can set out a price and by writing that ticket, the entire field responds to validate, reject or shift the entire market. That shifting is what Ayache calls a "Blank Swan" as it is a precursor to the grand events in the market, rallies and drops, bulls and bears.
In that sense Ayache sees the creation of market as pure plateaus, emerging and vanishing according to their own dynamics, each actions sensical at one level but ultimately creating or supporting or distortion the logics of each contingent claim.
This is no longer about the probability of an event or not. Rather, it is that with each additional derivative, so the probability can shift completely. We cannot judge the future based on the present because each moment comes about with its own future.
So there are market makers who make the market, although it's also likely that there are markets that make market makers.
I highly highly recommend this book if the philosophy of finance is something that would interest you. In some ways this also dovetails with The Elements of Structured Finance in which those authors through a Heideggerian perspective, show how a deal at its finality brings us back to its meaning/being in the present. If Rutledge and Raines show us the nature of credit for securities, and how that price is extracted from the collage of assortments in the world, so Ayache talks about the nature of price from the market.
Rutledge and Raines present an immanent justification of financial value
whereas
Ayache show us a transcendental price justified by the market.
[Note: The contrast of price (via the marketplace) and of value (via the structured finance underlying the instrument) is intensely interesting. No wonder the market is fragmented. Depending on who you are, you can see there is a gap between investors looking to buy securities on the marketplace and corporations looking to sell securities to raise capital.)]
I am not sure if he wrote a book before this one. If so, then this is an impressive work. Its dense, it's surprisingly clear, and its imaginative in how it utilizes some of its core metaphors (like "going to Sydney" or "Barton Fink") and for that reason it is amazing. I am not always sure if this is the most direct manner though. He starts off fairly heavy into philosophy but eventually departs this to highlight the manner in which one should understand derivatives.
The subject matter is mainly to challenge a kind of Newtonian thinking on the part of people believing that value is somehow ontological and reflected in part by price. This kind of representational thinking doesn't capture the dynamic nature of the Blank Swan.
Essentially, as a play on "Black Swan" Ayache speaks of a derivative that shifts the entire market. He doesn't talk about the probability of something coming into existence, rather that existence (and becoming) are made in the moment with each claim. The market maker can set out a price and by writing that ticket, the entire field responds to validate, reject or shift the entire market. That shifting is what Ayache calls a "Blank Swan" as it is a precursor to the grand events in the market, rallies and drops, bulls and bears.
In that sense Ayache sees the creation of market as pure plateaus, emerging and vanishing according to their own dynamics, each actions sensical at one level but ultimately creating or supporting or distortion the logics of each contingent claim.
This is no longer about the probability of an event or not. Rather, it is that with each additional derivative, so the probability can shift completely. We cannot judge the future based on the present because each moment comes about with its own future.
So there are market makers who make the market, although it's also likely that there are markets that make market makers.
I highly highly recommend this book if the philosophy of finance is something that would interest you. In some ways this also dovetails with The Elements of Structured Finance in which those authors through a Heideggerian perspective, show how a deal at its finality brings us back to its meaning/being in the present. If Rutledge and Raines show us the nature of credit for securities, and how that price is extracted from the collage of assortments in the world, so Ayache talks about the nature of price from the market.
Rutledge and Raines present an immanent justification of financial value
whereas
Ayache show us a transcendental price justified by the market.
[Note: The contrast of price (via the marketplace) and of value (via the structured finance underlying the instrument) is intensely interesting. No wonder the market is fragmented. Depending on who you are, you can see there is a gap between investors looking to buy securities on the marketplace and corporations looking to sell securities to raise capital.)]
August 31, 2021
Probability is about potential world states. But reality is about contingences that happen. Events that are actualized. That are written. That fill in the blank spaces. In contrast to the impact of highly unexpected events deemed Black Swans, or the highly expected events of White Swans, the processes of reality are Blank Swans. Neither about probabilities nor about possibilities. They are the events that happen. Possibility is a metaphysical construct to explain historical contingencies, projected forward. The world is made of contingency, but it incorporates values that we expect of the future, of different futures. The transitions into the future are real which are marked by the material process. It is not based on predictions or forecasts.
Whether events are predictable or unpredictable, they represent the content of vision. Unpredictable events are usually not taken into account until they occur, at which point they are considered to be part of the possibilities which are prepared for. The market does not trade probable futures, but the value and price worth presently. The price represents the trade, while what is earned represents a difference. It is a direct statement related to someone else’s value set.
Words spoken are predictions of being understood. All knowledge is predictions about entities of the world and their properties. The market replaces knowledge as it is not theory, the prices actually happen. The market is a medium of contingency. The market does not represent the future, it represents the performative moment of the trade.
The book has an important concept to deliver, but the delivery itself is a failure. Rather than elucidating the concept, the book progressively becomes more convoluted. There are themes that run through the book, such as of writing and the market, but they become seemingly more difficult to understand. Understanding many explanations requires to already have known a lot of specific background knowledge, which makes understanding the topic very difficult. The book’s difficulty partly lies with the context of a very novel idea of contingency as apposed to probabilities. It will take other books and possible other authors to make the ideas in this book applicable to the real world. That is this book’s value, its failing delivery succeeds in inspiring ideas to make them palpable.
Whether events are predictable or unpredictable, they represent the content of vision. Unpredictable events are usually not taken into account until they occur, at which point they are considered to be part of the possibilities which are prepared for. The market does not trade probable futures, but the value and price worth presently. The price represents the trade, while what is earned represents a difference. It is a direct statement related to someone else’s value set.
Words spoken are predictions of being understood. All knowledge is predictions about entities of the world and their properties. The market replaces knowledge as it is not theory, the prices actually happen. The market is a medium of contingency. The market does not represent the future, it represents the performative moment of the trade.
The book has an important concept to deliver, but the delivery itself is a failure. Rather than elucidating the concept, the book progressively becomes more convoluted. There are themes that run through the book, such as of writing and the market, but they become seemingly more difficult to understand. Understanding many explanations requires to already have known a lot of specific background knowledge, which makes understanding the topic very difficult. The book’s difficulty partly lies with the context of a very novel idea of contingency as apposed to probabilities. It will take other books and possible other authors to make the ideas in this book applicable to the real world. That is this book’s value, its failing delivery succeeds in inspiring ideas to make them palpable.
June 17, 2012
completely inaccessible and inconsistent ramblings, riding on the popularity off Taleb's "Black Swan" publication
October 10, 2020
Dense and 3 times too long. Very interesting when he uses quantum theory to describe derivatives markets as an alternative to predictions and very interesting analogy between trading and writing, but the repetitions in the book and all the walking back toward Borges, Quixote and Pierre Ménard, make the reading not that rewarding.
September 17, 2022
idk man..........
October 23, 2011
Another trader with a delusion of philosophical grandeur. No wonder the markets are in trouble ... This book very hard to read and/or nearly unreadable.
Displaying 1 - 6 of 6 reviews