The Money Formula Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets

The Money Formula takes you inside the engine room of the global economy to explore the little-understood world of quantitative finance, and show how the future of our economy rests on the backs of this all-but-impenetrable industry. Written not from a post-crisis perspective – but from a preventative point of view – this book traces the development of financial derivatives from bonds to credit default swaps, and shows how mathematical formulas went beyond pricing to expand their use to the point where they dwarfed the real economy. You'll learn how the deadly allure of their ice-cold beauty has misled generations of economists and investors, and how continued reliance on these formulas can either assist future economic development, or send the global economy into the financial equivalent of a cardiac arrest.

Rather than rehash tales of post-crisis fallout, this book focuses on preventing the next one. By exploring the heart of the shadow economy, you'll be better prepared to ride the rough waves of finance into the turbulent future.

• Delve into one of the world's least-understood but highest-impact industries
• Understand the key principles of quantitative finance and the evolution of the field
• Learn what quantitative finance has become, and how it affects us all
• Discover how the industry's next steps dictate the economy's future

How do you create a quadrillion dollars out of nothing, blow it away and leave a hole so large that even years of "quantitative easing" can't fill it – and then go back to doing the same thing? Even amidst global recovery, the financial system still has the potential to seize up at any moment. The Money Formula explores the how and why of financial disaster, what must happen to prevent the next one.

PAUL WILMOTT is a researcher, best-selling author, and consultant in most things quantitative, and has been a fund manager and academic. He is author of numerous books, including Paul Wilmott on Quantitative Finance and Frequently Asked Questions in Quantitative Finance.

DAVID ORRELL is an applied mathematician, best-selling author and founder of Systems Forecasting, a scientific consultancy. He is the author of many books, including The Future of Everything and Economyths.

Contents

Acknowledgements ix

About the Authors xi

Introduction xiii

Chapter 1 Early Models 1

Chapter 2 Going Random 15

Chapter 3 Risk Management 35

Chapter 4 Market Makers 61

Chapter 5 Deriving Derivatives 83

Chapter 6 What Quants Do 109

Chapter 7 The Rewrite 135

Chapter 8 No Laws, Only Toys 149

Chapter 9 How to Abuse the System 169

Chapter 10 Systemic Threat 189

Epilogue: Keep it Simple 207

Bibliography 227

Index 237

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