Monday, March 10, 2008

Michael Lewis Exposed

I remember way back when I read Liar's Poker, and thought, good read, but wrong. That is, to the extent Michael Lewis stuck to personalities, anecdotes about the rich and famous, and allusions to his major of art history, he was great. When he made riffs on economics, such as, that it's all based on hype, or everyone is a big faker, it was an overstatement to a considerable degree, and degree is ultimately important. It's not all a game of BSDs playing macho games, there are some real issues about pricing and risk management, which Lewis was oblivious to in his brief career there.

His latest article in notes that the subprime mess is because...Black-Scholes is wrong! I worked with some guys who thought Black-Scholes was wrong, and would write papers to journals, and didn't get any traction. The key is, it is not 'wrong'. It has been proved several independent ways. It is--sacre blue!--based on incorrect assumptions, and since day one, people have been addressing what happens when this assumption is changed, etc. Models are always wrong, sometimes useful. Lewis doesn't really understand finance, which is why he would be shocked to know that people were layering B-S with outside the box adjustments before he went to college. But even if Black-Scholes is predicated on the idea than you can sell a stock at its price, and this is wrong (er, so the price is not a price?), what the heck does that have to do with subprime? The subprime mess was about as related to Black-Scholes as the Dividend discount model, or the Miller-Modigliani theorem, or Fisher's breakdown of the interest rate into a real rate and inflation expectations. They all involve numbers, finance even, but not really the same. If they were relatives, they would be 'third cousins once removed'.


Anonymous said...

anyone reading Liar's Poker could tell that Lewis did not know his stuff. but that was one of the key points. he didn't need to.

at the end of the day, it's about money and the status it brings. those seeking that status don't care about the "academic" side of things. if they did, they'd seek status through academia.

Lewis is not my type of person (a wee bit too shallow), but I really like his writing and he seems like an entertaining guy. he can tell a story and there is great power in that. a power used by many on wall st, as evidenced by many of my friends who went to work there around the time of that book.

Lewis efectively gave us fair warning, and no doubt lured in many young people depite it, that to be successful in those jobs, it was much more about people skills, your poker face, than about financial knowledge.

it doesn't matter if Lewis was wrong: it's about the cash, and the status it brings, not being "right".

very different from "academic status" which is something that has to be earned by consensus, not simply cash. others have to agree that someone is "right".

Anonymous said...

if you think making money requires (in a cognitive capacity) academic education, you're a fool.

academic education has value apart from how it helps one make money. having princeton on your resume and other personal charactersistics help one get in the door, but the actual business of making money could be executed by anyone with a reasonable degree of emotional intelligence.

you don't major in art history because you want to sell paintings. you do it because you like art, or like to party.

the majority of economic theory is pure retrospect.
we look at stats and then say something. usually pessimistic.

without exerimentation and reproducibilty of results, it's hardly a "real" science.

no one (in the majority readership of these publications) really cares whether Lewis is right. it's the way he can tell story and describe these often ridiculous theories that rely wholly on analysis of things that have happened and not on repeated experimetation. note: simulations are not experiments.

in some ways, he is right. in that he's calling bullshit. and he no doubt has many people in the services industry uncomfortable.

what if someone says, "hey great theory. prove it. show me THE DATA."

saying, "well look what happened here, and here, and here", historical data, might not be enough.

clients wants to know what GOING TO HAPPEN. and you can only be wrong so many times before they lose faith.

they just want the cash, not the methodology..

ask Mr Madoff.

Anonymous said...

I want to take back my comment that Lewis seems "shallow" t o me. What I really meant was that although I like his writings, I could not identify with some of his apparent interests and perspectives- namely, his focus on baseball, first and foremost, above other sports.

Well, I just learned a while back that he has written a book on FOOTBALL.

Lewis, you are one cool dude, no matter what anyone says.

Anonymous said...

"If merely looking up past finacial date would tell you what the future holds the Fortune 400 would consist of librarians."
- the world's 2d wealthiest man, inheritances negligable

Anonymous said...

typing is not my forte

financial data

"negligible inheritance" means his wealth is so-called "self-made"