Pricing the Future: Finance, Physics, and the 300-year Journey to the Black-Scholes Equation

by George G. Szpiro

Options have been traded for hundreds of years, but investment decisions were based on gut feelings until the Nobel Prize -- winning discovery of the Black-Scholes options pricing model in 1973 ushered in the era of the "quants." Wall Street would never be the same.

In Pricing the Future , financial economist George G. Szpiro tells the fascinating stories of the pioneers of mathematical finance who conducted the search for the elusive options pricing formula. From the broker's assistant who published the first mathematical explanation of financial markets to Albert Einstein and other scientists who looked for a way to explain the movement of atoms and molecules, Pricing the Future retraces the historical and intellectual developments that ultimately led to the widespread use of mathematical models to drive investment strategies on Wall Street.

Genres: Economics, Finance, History, Nonfiction, Science, Mathematics, Audiobook

320 pages, Hardcover

First published November 1, 2011

About the author

George G. Szpiro is an Israeli-Swiss applied mathematician and journalist, who has emerged as a writer of popular science books.

Reviews

[Patrick · Rating 5 out of 5]

Amazon review:
One of the major intellectual achievements of the 20th century was the theory of option pricing. This is its story, and it’s absolutely fascinating. Options have been around since the buying and selling of tulips and the very first efforts of investors to control their downside risk. But the economic value of such protections was not finally understood until the Nobel Prize winning research of Fischer Black, Myron Scholes, and Robert Merton in the 1970’s. It could not have happened without 350 years of serious thinking by botanists, physicists, chemists, and mathematicians. Finally, by 1960 all the pieces were in place, and Black, Scholes, and Merton solved the puzzle. The book should be required reading of all first year PhD students in finance, and economics, simply to see what is needed for path-breaking research. For the rest of us with an interest in the origins of important ideas, this is a great read.

[Terry · Rating 4 out of 5]

The book should have been titled "The History of the Development of Statistics Pertaining to Things that Move Randomly and How Smart People Used that to Sometimes Make Money/Destroy the Economy". Once one comes to terms with the fact that the scope of this book is much larger than one would think, the text turns out to be both fun and engaging.

Options are a form of derivative (no actual commodity or security changes hands) where one gains the ability to buy or sell something at a future date and a present set price but only if one wishes. One can use an option as a hedge (reducing risk) by locking in a price to buy or sell or as a speculative risk (increasing risk) to profit. Historically, pricing options was not technical and this book tracks the development of the process of pricing options. Along the way, one is exposed to the development of Brownian motion, random walks, stochastic calculus, Holland's tulip bubble, French currency speculation, Spanish stock trading, the founding of the Dutch East India company, atomic theory, and the fat-tailed nature of investment returns. None of these topics are glossed over and each provides another bit in this history of the Black-Scholes pricing formula.

The book does run into some issues. The examples are often more convoluted than needed to make a point and the author has a penchant for including quotes in the original French or German but these are hardly critical flaws. The best summary of the book? Interesting.

[Maximilian Held · Rating 2 out of 5]

I was disappointed by this book. I'm not even an expert on the economics and math of it, but here's what bothered me:
- the story was littered with what seemed irrelevant biographical trivia of the authors. If there *was* a story or common theme behind this, I didn't get it.
- the prose is a bit clumsy and full of clichés.
- there's really hardly any history of ideas, putting the development of the options pricing formula in context. That's sad.
- oddly, and very much to my disappointment, the author almost entirely misses the elephant in the room: that actually, many financial variables are *not* normally distributed, and that fat tails and systemic risk abound. The 2007ff-financial crisis is discussed, but only as a bit of an afterthought in the last chapter.
- there is hardly any fundamental discussion of the axioms of options pricing.

I had great hopes for this book, but I can't recommend it.

"Black Swan" by Taleb, while *preceding* the financial crisis is a much more interesting, better written, and inspiring treatment of the (broader) subject.

Ps.: Also, the audiobook presentation botches pretty much any language but english. The somewhat lengthy (and pointless?) passages in French and German are painful and hardly recognizable. Other than that, the audiobook is ok, though.

[Tracie Hall · Rating 4 out of 5]

Pricing the Future: Finance, Physics, and the 300-year Journey to the Black-Scholes Equation by George G. Szpiro
November 29
BIBLIOGRAPHIC DETAILS
--PRINT: © November 29, 2011; 978-0465022489; Basic Books; 1st edition; 320 pages; unabridged. (Hardcover info from Amazon.com)
--DIGITAL: © November 29, 2011; Basic Books; 1st edition; 320 pages; unabridged. (Kindle info from Amazon.com)
--(This one) *AUDIO: © November 29, 2011; Audible Studios; Duration: 10 hours; unabridged. (Audio info from Amazon.com)
(FILM: No.)

SERIES: No

SUMMARY/ EVALUATION:
--SELECTED: Don purchased this book and we’ve had it for years. I’m starting with the oldest in our Audible collection and working my way up, just to feel like we’re getting our money’s worth out of these purchases.
Because I have never studied math to any great extent, I am not particularly good with it, or anything that depends on it, like science and finance, but am ever hopeful I can absorb information anyway.
--ABOUT: This is a wonderful convergence of history, biographies, finance (lots of investment explanations), math, and science.
--OVERALL OPINION: My eyes may have glazed over periodically, but overall, I did find it quite interesting.

AUTHOR:
George G. Shapiro

“George Geza Szpiro (born 18 February 1950 in Vienna)[1] is an Israeli–Swiss author, journalist, and mathematician. He has written articles and books on popular mathematics and related topics.
Life and career:
Szpiro was born in Vienna in 1950, and moved to Zug, Switzerland, in 1961.[2] He obtained a master's degree in mathematics and physics from ETH Zurich. He also obtained an MBA from Stanford University, in 1975.[2] Afterward, he worked as a management consultant at McKinsey & Company.[3][4] In 1984, he obtained a Ph.D. in mathematical economics from Hebrew University.[2][4]

Szpiro was an assistant professor at the Wharton School of the University of Pennsylvania, during 1984–1986. He was a lecturer in mathematical economics at Hebrew University, during 1986–1992. He also taught at the University of Zurich.[3][4] He has published research papers related to mathematics, finance, and statistics.[5]

Since 1986, Szpiro has worked as a journalist at Neue Zürcher Zeitung.[2] At NZZ, he has been the Israel correspondent and mathematics columnist.[2][6] For his mathematics columns, Szpiro was awarded the Prix Média by the Swiss Academy of Natural Sciences, in 2003.[7][8] He was also awarded the Media Prize by the German Mathematical Society, in 2006.[4] Beside writing for NZZ, he has also written non-research mathematics columns for journals such as Nature and Notices of the American Mathematical Society.[5][6]” __From Wikipedia

NARRATOR(S):
Brian Troxell
No biographical information located online.
*ME: Great narration.

GENRE: Nonfiction; Economic History; Science; Finance

SUBJECTS (Keywords): (Not comprehensive)
Multiple brief biographies; Mathematics; Investing and Trading; Economics; Finance; Science; Black-Scholes Equation; Stocks; Tulipomania; Holland

DEDICATION: Not found

SAMPLE QUOTATION: From Chapter 1 “Flowers and Spices”
In the 1630s an unprecedented frenzy of buying and selling seized large parts of the population in Holland. People sold all their belongings and even went into debt in order to invest in a commodity that had no intrinsic value. When investors finally realized this, the price of the commodity plummeted and many lost their assets. To save those clamoring most loudly for protection from disaster, the government took action, thus worsening the crisis.
What was this article of trade that caught the fancy of investors, speculators, and fortune hunters? Businessmen, mainly from Spain, Portugal, England and Holland, had been roaming the world looking for extravagant merchandise to take to Europe. Among these luxury items was a very special flower found in Persia and Turkey. First described around the middle of the sixteenth century by the Austrian ambassador to the court of Suleiman the Magnificent in the Ottoman Empire—he described them as having little or no scent—the flower became popular among the European upper classes, especially in Holland. It was the tulip. Admired for its variations in color and beauty, the tulip soon became a symbol of wealth and opulence.
It was not wild tulips that elicited the Dutch people’s passion but cultivated ones, many of them carrying a virus that gave their petals highly unusual patterns but also made them hard to grow and consequently all the more rare and desirable. By 1636 this admiration for tulips went far beyond appreciation of their beauty. Tulip bulbs became objects of speculation, first among the cognoscenti, then among the simple folks, with investors buying them not for the esthetic value of the eventual flowers but in the hope of rising prices. The journalist Charles Mackay devoted a chapter of his 1841 book “Extraordinary Popular Delusions and the Madness of Crowds” to what he called tulipomania. Even though his description was not correct in every detail, the name stuck.”

RATING: 4 stars.

STARTED-FINISHED 8/4/2024-8/9/2024

P.S.
For information on the Audiobook version which Goodreads does not list (I can't find the option to add a version), see: https://www.amazon.com/Pricing-Future...

[Julia · Rating 4 out of 5]

"Pricing the Future" is a good chronology of how the Black-Scholes-Merton option pricing model came to be (as the title alludes). The journey starts far back, providing colourful history on the beginnings of some financial markets, speculation, and claim-contingent agreements that could be considered today as options. Along the way, Szpiro calls on work by notable physicists, chemists, and the like, as behaviour observed in the natural sciences can also be translated to performances in the financial markets.

For those interested in the above, while taking scenic routes to read about some of the personal lives of the aforementioned scientists and economists, this book may be a very suitable recommendation. Although it is important to pay credit where credit is due, it seems that there are many pioneers across many disciplines to acknowledge. For those interested in the express lane (or even just the main road) to the derivation of the BSM model, perhaps certain chapters could be skipped. If the book was a sandwich where the Black-Scholes equation was the meat, this sandwich may have a lot of bread and garnish while skimping out on the meat. At the end, Szpiro also gives meaningful warnings to using the model in practice, though it felt rushed. Nonetheless, this book is not advertised as a lesson on employing options or broader derivatives in trading strategies.

This is not all to say that the book is not worth a read. I started and finished the book today. Szpiro tells the story in a manner digestible to laymen. This book has left me with numerous new book recommendations, albeit mostly denominated in French/German and published before the 21st century. It has also left me with more consideration for random walks and fat tails. Finally, this book has left me with a greater respect (and regret) for Fischer Black, Myron Scholes, and Robert Merton.

[David · Rating 4 out of 5]

This is a pretty interesting book, though I'm not sure who the audience is. Academic economists and finance professors, I suppose. It was a nice survey of some intellectual developments, but when the payoff came and Black, Scholes, and Merton show up, the continuity of the narrative seemed a bit off and I had trouble finishing up the last few chaptes. Overall, though, I did marvel at the author putting this togehter and I did learn quite a bit about the origin stories of many of the techniques I picked up in my studies.

[Marco · Rating 4 out of 5]

A stunning choral narration: light but detailed — even technical when needed — never rhetorical but always able to point out both the human and the "heroic" elements of the main characters' pursuits and the subtle connections between them. If you get a kick out of either the history math concepts or the reasons why our financial world came to be, then this book is definitely for you!

[Shixiao Yu · Rating 4 out of 5]

Covered a surprisingly broad array of topics—history, physics, math—but I suppose that's to be expected. It was enjoyable following the journey of options pricing around the world and in the hands of several different economists, brokers, botanists, physicists, etc. Szpiro's descriptions are in-depth and understandable for the average layman.

[Jaume · Rating 5 out of 5]

Very engaging and illustrating, connecting seemingly unrelated fields with great story telling.

[David · Rating 4 out of 5]

The books covers the advances in physics and probability theory that led to the establishment of the Black-Scholes formula for pricing options. The story is told using the histories of the the scientists and mathematicians involved, and puts them into historical context. It's a great read, and a great introduction to the history of this corner of finance and the history of this branch of probability. A good exploration of the history of Brownian motion, Bachalier's story is told, and even Einstein makes an appearance. Ito also gets the chapter he deserves. The weakness is that the flaw of the Black-Scholes formula -- its reliance on normal distributions -- isn't developed enough in terms of how that affects practitioners and banks and their risk systems. Mandelbrot is only mentioned in terms of fractals, not in his study of the instability of time-series and prices, and Nasim Taleb of Black Swan fame (no, not the ballet movie) is not mentioned at all, probably much to his dismay. Taleb and a few others in a rabid a vocal minority, claim that the Black-Scholes equation is nothing more than a distortion of Bachalier's ideas, and these distortions and ignorance of fat-tail events modeled by Mandelbrot are what led to the financial crisis. While a minority opinion, it's probably a discussion that should have been commented on in a current discussion of the equation.

I'd recommend it for anyone interested in the history of math, finance and physics and how they have come to intersect. There's only one equation in the book, so don't be daunted if your math is rusty. _Against the Gods_ is a deeper exploration of the history of risk overall, but this is a lighter and less intimidating read, and has great historical portraits of the players involved.

[James · Rating 1 out of 5]

Most of the stories in the book have been told by others,
the book is a cut and paste of many little stories from the past.

Nothing new.

The author seems to think the Black scholes equation is something important,
1. the key part of the equation is Implied volatility,
something not listed in the index.
2. What is implied volatility?
It's a fudge factor in the equation to make things work,
but the fact is, no one can know what IV is without knowing first,
what the price of an option is.

In theory, the BS equation tells you what an option should be worth,
in practice, people look at the marketplace,
see what people are paying for an option,
then saying: the market is always right,
knowing what the price of an option is,
they can then find what IV is.

Instead of finding the right price for an option,
the formula is used to find the value of one of the variables.

And what's that worth?
Not much I'd say, you can compare IV today with historical numbers to get a feel for whether investors think volatility is going up or down,
but it doesn't tell you anything that'd lead you to make money in the options market.

FWIW, I've traded options, I made money,
but the BS equation played no part in it.

IOW's, another example of academics who know little of the real world pretending they are experts.

The blowup of LTCM is evidence of the uselessness of economists.

[Ed Terrell · Rating 5 out of 5]

I can't decide why I liked this book so much. Is it the development of Bachelier's ideas from the 19th century on probabilities and financial markets? Is it the historical perspective of how our system of finance has come into being starting with creation of the stock market under King Louis XV? Or finally, is it how elegant theories mixed with our all too common human avaricious capacities can lead even the best, the most knowledgeable and the most connected astray?

From the tulipomania of Holland in the 1600s to John Law's creation of paper money in France, we are thrown time and time again into the washing machine of financial turmoil. Szpiro takes us on a Mr. Toad's wild ride over the course of 300 years, culminating into how the pricing of options has finally developed. What is amazing is that it's roots lie in Brownian motion and formulas for heat flow dynamics. This is a story of how two very different pathways of scientific inquiry come together and blossom into a very practical way to improve our understanding of how the world works. Caveat emptor!

[Brian · Rating 3 out of 5]

(3.5) Well-written history (emphasize history) of Black-Scholes

Traces the history of the formula to value stock options from the very beginning (issuing of stock, development of futures, tulipomania etc.). All good stuff, but for a few glaring typos, particularly in chapter 16 or 17 (missing words, use of a subscript instead of superscript on a particular term in text describing the formula). Some careless stuff in there.

So good history, well-told and enjoyable. But we're really light on the math here. I understand...we all want to sell books, so it's more accessible to the general public, but most of the math is at best hand-wavy. I enjoyed, but want something in between the original paper and this 'soft' version of the development of the formulation of the PDE and its solution.

[Nick Ertz · Rating 4 out of 5]

You wouldn't think learning the history of the Black-Scholes pricing formula would be much of a read. This book changes that. The author thoroughly covers the history the market, and the history of the science that lead to the eventual discovery of the equation and its solution. It is an excellent and exciting trip through time which provides a solid understanding of what its all about. There are even some cautionary tales for the modern option buyer.

[Robert · Rating 2 out of 5]

Interesting, but a bit unfocused, wanders all over the place, and in the end I am not sure I learned very much.

If you want to have a good understanding of how options work, their history and the Black-Scholes equation (which you might expect from the title), I think you'll come away disappointed. Sure, all of these things are discussed, but in a rather superficial way without enough depth to really get any insight.

[Rishi Patel · Rating 2 out of 5]

The author threw in a lot of needless information of many many people that weren't key figures in this book. I was a bit disappointed because I thought it would be more along the lines of how the Black Scholes formula formed the derivatives market, but this book is about the history behind the creation of the formula.

[Ariel Burbaickij · Rating 2 out of 5]

There is a mistake in my edition of the book in the appendix where the feeling for how the formula is derived is presented (A Pedestrian's guide...) 1/2 * \frac {partial^2C}*{partial S^2}\sigma^2S^2 should be preceded by "-" instead of "+" and I did not like _at all_ how author reacted to it once it was pointed out.

[Troy · Rating 4 out of 5]

A great walk through the history and evolution of pricing financial options. I thought it was especially engaging how the author tied in landmark advances in the natural sciences which contributed to the math of finance.

[Chris Mcmanaman · Rating 4 out of 5]

Great book. Its amazing how all these scientists built on each other. It is funny to read about how economics papers were written and that mathematical formulas were shunned from the academic community.

I really should read this book over again so I understand it completely

[Aaron Hook · Rating 2 out of 5]

More of a 2.5 than a 2. Some good, interesting information in here, but it could have done away with a lot of the biographical fluff on various historical players, and maybe have added some more technical details. The writing was pretty mediocre and the copy-editing was not great.

[Paul · Rating 3 out of 5]

All this book shows is that at the dawn of economics clever mathematics have been invented but found not to describe reality well so it was later fudged and amended by "lucky guesses" (?) until people thought it did.

[Bryce · Rating 4 out of 5]

Very interesting. Makes a few unsubstantiated claims here and there, and not enough citations.

[Greg Mcavoy · Rating 3 out of 5]

Starts slow, but gets better once it gets to Black-Scholes.

[Philski · Rating 4 out of 5]

Easy read. Not as technical as I was hoping for.