Paul Wilmott was trained as a mathematician at Oxford. He worked in Fluid Dynamics briefly. Fluid dynamics is very hard discipline as the equations (currently) cannot be solved. If you can create a proof showing that the Navier-Stokes equation can be solved then you can get a million dollars for it from the Clay Institute. Dr. Wilmott quickly gave up on fluid dynamics, and moved into a new direction: Quantitative Finance a discipline closely related to the area of finance called `Derivatives Trading.’
I quote From Wikipedia:
Paul Wilmott is a researcher, consultant and lecturer in quantitative finance. [1]. He is best known as the author of various academic and practitioner texts on risk and derivatives, [1] and for Wilmott magazine and wilmott.com, a quantitative finance portal.
He is the Course Director for the Certificate in Quantitative Finance at 7city Learning, a London-based company providing training for the financial services industry.[2] He is a founding partner of Caissa Capital, a volatility arbitrage hedge fund [3]. He is on the editorial board of the academic journal International Journal of Theoretical and Applied Finance [4]. He founded the Diploma in Mathematical Finance at Oxford University;[5] and the journal Applied Mathematical Finance.[6]
His books are popular for their presentation of "complex subjects in an accessible and often humorous way" [7]. He has written research articles on finance and mathematics, and, amongst others, has authored the following textbooks:
• Frequently Asked Questions in Quantitative Finance (Wiley 2006)
• Paul Wilmott On Quantitative Finance (Wiley 2006)
• Paul Wilmott Introduces Quantitative Finance (Wiley 2007)
• With J.N.Dewynne and S.D.Howison, Mathematics of Financial Derivatives: a Student Introduction. (Cambridge University Press 1995).
He studied mathematics at St Catherine’s College, Oxford University, where he received his D.Phil in Applied mathematics in 1985[8].
Paul Wilmott is together with Emanuel Derman one of the authors of the Financial Modelers' Manifesto.[9]
Dr. Wilmot runs the Wilmott website. Paul is a devotee of the free market. Anyone interested in modern finance should join this web site for free. One of his associates Dr. Nicholas Taleb has a free podcast about The Scandal of Prediction: Audio podcast. In it he presents the basic thesis about his brilliant book ‘The Black Swan’. His professional interests (after he became independently wealthy trading derivatives) lies in the nature of random events and how they affect our lives. The podcast which dates from about 2005 lays the trail for what Austrian Economics have always known would happen: central bank driven business cycles at unpredictable times through malinvestment.
I have written about the conventional wisdom and how destructive it can be. Taleb's book is about how people believed that all swans were white, everybody knew that. It was the accepted knowledge, right up until black swans were found in Australia. Another way to look at this is that ‘Conventional Wisdom’ can cause the benighted masses to go over the proverbial cliff in a herd when it turns out to be untrue. His premise is that the statistically unusual has far more impact on our lives than the usual. Where were you the day John Lennon was shot? Where were you on Black Tuesday in 1987? Where were you when the American economy collapsed? These were all dramatic and statistically unusual events, black swans of our times.
The Federal Reserve is full of economists making predictions. As all readers of LRC know, and as most Austrian economists know, and as the majority of Americans did not know, was that the housing driven wealth cycle of the first decade of the twenty-first century was a façade and was going to collapse. I predicted it in 2005, but did not write about it until 2006. None of us knew when it would collapse. You do not know how big a balloon can be blown until it bursts, and at that point it is no longer a balloon that can deflated. Warren Buffet, Alan Greenspan and Paul Krugman are all financial experts, but they did not know what was happening they are experts that are supposed to know. Which goes along with another of Dr. Taleb’s theses: statistically experts are no better than the common man, and in some scenarios are worse. This is clearly one of them. It makes Dr. Taleb’s thesis reified.
If you listen to the podcast, a must, and/or buy the book, a should; you will learn that based on the data Dr. Taleb has found with respect to prediction professionals that financial analysts are the worst, followed by politicians, that are followed by economists. Medical doctors prediction records are not as good as their knowledge records. What disciplines are the best? Weather forecasters are. Another of his main points is that based upon business disciplines: if your product is talk/writing based your prediction rate is generally poor, if it is number based it will be much better. Weather charts are produced continually thanks to all the satellites that have been launched. These charts are mathematical fields (number based). Predictions from them are correct about 90% of the time. Financial analysts charts are based upon history, even if it is the history of the last 10 minutes; and then from this data the future is predicted which is extrapolation and this is a much riskier and thus uncertain mathematical tool. The numbers of the past (interpolation) are way better than the numbers of the future (extrapolation).
Do not blame the financial services is industry for what has happened of late, as they give clear and important reminders in their service agreements, the customer assumes the losses, not the provider of the financial servers. They are legitimate businesses playing by the rules. The problem lies with our leadership that has created the problem: the Federal Reserve ‘Bank and their liquidity game’. This game is a massive distortion in orderly markets that make billions of transactions every day, it forces mal-investment. The Fed has only one tool in its arsenal, after you discount the talk of its economists, which is monetary inflation. Look at the chart of liquidity injection versus gold price, the data is in the numbers and is quite telling.
Warren Buffet has amassed a great fortune with his buy and hold long term business strategy. He laid some of the blame on ‘derivatives’ for the current predicament, when he called ‘Weapons of Mass Destruction’. I am not a big fan of Warren Buffet, and on this issue he is clearly wrong. Derivatives are insurance policies for large firms; nothing more. Lloyd’s of London insures ships and their cargo against the uncertain and the perils of ocean transport. You do not blame Lloyd’s for the hurricane that sank the ship and sent to cargo to Davy Jones’ locker.
Our 401K’s did not tank because GM or Merrill Lynch had a bad day in the marketplace, they tanked because of all of the excess credit that the Federal Reserve (courtesy of Al Greenspan and Bill Bernanke) pumped into our monetary system (as most LRC readers know). That was the America’s Black Swan. Like a pandemic the bad paper has driven the good money out of our economy. Since 1913 when Congress created the Federal Reserve we have had a few Black Swans, like the great depressions of 1932 and 2010. There have been a lot of little swanlings of various colors in various times but of lesser importance. The Federal Reserve was created to level out the swings in the business cycle, and like all government programs, this one is achieving the exact opposite of what is intended. The Defense Department gets us into wars. It should be renamed the War Department then it will honest about what it does.
In ‘The Black Swan’ Taleb said “Bankers dress and act conservatively to hide all the dangerous things they’re doing with your money.” Check the price of many bank stocks and you will realize that many of them sacrificed their wealth along with their customers, massive write downs being the order of the day. The only way to stop this malfeasance is to disarm the perpetrator. The United States should move to a commodity based currency. Let the Treasury Department go back to minting gold and silver coins (platinum and Iridium would be OK too). The Fed can just go away, enough bad talk, bad predictions, and bad results: monetary inflation, and the impoverishment that follows. Let the Federal Reserve economists go unemployed and maybe in time they will become productive.
The irony is that the United States of America will one day return to real money; it is as inevitable as the dawn. Paper money always asymptotically goes to zero. The dollar now has competition. The uncertainty and the risk between now and then is very much unknown. Remember you only hear pundits crow the few times they right, when they are wrong it goes unsaid. The question is in the timing. If you know the answer to that you could be very wealthy by following that prediction. Governments always fight desperately to retain the Central Bank because once it goes so do their hands on lever of power they wield so irresponsibly.
I recommend the Wilmott website and Paul Kasriel’s Northern Trust Econtrarian web site as they along with LRC and the Mises sitehave actually been correct of late explaining black swans and against the tide of all these government programs we currently drown in. As I have said many times: repeating lies often does not make them truth and its corollary is that unpopular truth does not become false.
Res Ipso Loquitur
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