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Apr 24, 2011 at 9:46 AM

Fischer Black thought vocabulary was important. When you talk to someone, you use words and words have meaning. He was right.

As my friend Peter Carr once taught me, you can't use the word volatility without an adjective. My first interview on Wall Street was with Mike Rabin when he worked for Chase. He asked me what the word volatility meant. I had no idea. I was reading about James Abbot McNeill Whistler at the time and wanted to give him a smartass answer. "Volatility, sir, is a gas." According to Whistler's account, he was thrown out of West Point when asked to describe the chemical properties of boron. "Boron, sir, is a gas." He later claimed that if boron were a gas he would have become a Major General. 

I asked Mike what volatility was and he told me it was the derivative of something with respect to something and gave me a reference to a book by Ingersoll. That was my introduction to mathematical finance. I have a PhD in math. Mathematical Finance didn't seem to involve much in the way of mathematics. Twenty years later, it doesn't seem to involve much in the way of finance either.

Apr 24, 2011 at 10:24 AM
Edited Apr 24, 2011 at 10:27 AM

As a mathematician, I like starting from first principles. Adam Smith had many clever insights. I went to a talk at NYU last week where Gordon Brown introduced some guy I had never heard of. Amartya Sen. He won a Nobel Prize for his work on something or other. His wife, Emma Rothschild, was the Adam Smith expert, but she didn't show up because she was ill. I wanted to ask her what she thought about the relevance in today's world of Adam Smith's theory of wages and labor. Maybe I should have asked Gordon Brown. He probably knows more about that than she does.

Apr 24, 2011 at 10:51 AM
Edited Apr 24, 2011 at 4:41 PM

I've been reading The Wealth of Nations. It was written in a very different world from today's. The language is a little stilted, but I've found it is easier to read while feigning a Scottish accent. "The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals." It is definitely not a textbook. It is a man of the world calling it as he sees it. Truck, barter, and exchange are vocabulary. We still do this today of course, but use a different vocabulary.