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The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets
Explore the deadly elegance of finance's hidden powerhouse 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.
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.
244 pages, Kindle Edition
First published January 1, 2017
55 people are currently reading
496 people want to read
About the author
Paul Wilmott
36 books83 followersPaul Wilmott is a researcher, consultant and lecturer in quantitative finance. He is best known as the author of various academic and practitioner texts on risk and derivatives, and for Wilmott magazine and Wilmott.com , a quantitative finance portal.
He is the co-owner and Course Director for the Certificate in Quantitative Finance (CQF), a half year distance learning course on mathematical finance at 7City Learning, a London-based company providing training for the financial services industry. He is a founding partner of Caissa Capital, a volatility arbitrage hedge fund. He is on the editorial board of the academic journal International Journal of Theoretical and Applied Finance. He founded the Diploma in Mathematical Finance at Oxford University and the journal Applied Mathematical Finance. He is a director of Wilmott Electronic Media, which manages Wilmott.com, a website for the quantitative analyst community, and is a director of Paul & Dominic Quant Recruitment.
He studied mathematics at St Catherine’s College, Oxford University, where he received his D.Phil in Applied mathematics in 1985.
He is the co-owner and Course Director for the Certificate in Quantitative Finance (CQF), a half year distance learning course on mathematical finance at 7City Learning, a London-based company providing training for the financial services industry. He is a founding partner of Caissa Capital, a volatility arbitrage hedge fund. He is on the editorial board of the academic journal International Journal of Theoretical and Applied Finance. He founded the Diploma in Mathematical Finance at Oxford University and the journal Applied Mathematical Finance. He is a director of Wilmott Electronic Media, which manages Wilmott.com, a website for the quantitative analyst community, and is a director of Paul & Dominic Quant Recruitment.
He studied mathematics at St Catherine’s College, Oxford University, where he received his D.Phil in Applied mathematics in 1985.
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Displaying 1 - 27 of 27 reviews
June 10, 2025
แรกๆ พอไหว หลังๆ พอเลย แม่งยาก
แต่ถ้าถามว่าสนุกมั้ย อ่านสนุกจ้า ช่วงที่อ่านรู้เรื่องอะ หนังสือโคตรกวนตีนแต่ตรงไปตรงมาช่วงที่อธิบายเรื่อง options และประวัติศาสตร์โคตรตลก และหลังจากบทที่ 7 เป็นต้นไปก็อ่านไม่ค่อยเข้าใจละ จนหน้า 326 (ก็คือหน้าเกือบสุดท้ายของหนังสือที่ไม่ใช่บรรณานุกรม)
แต่ถ้าถามว่าสนุกมั้ย อ่านสนุกจ้า ช่วงที่อ่านรู้เรื่องอะ หนังสือโคตรกวนตีนแต่ตรงไปตรงมาช่วงที่อธิบายเรื่อง options และประวัติศาสตร์โคตรตลก และหลังจากบทที่ 7 เป็นต้นไปก็อ่านไม่ค่อยเข้าใจละ จนหน้า 326 (ก็คือหน้าเกือบสุดท้ายของหนังสือที่ไม่ใช่บรรณานุกรม)
December 18, 2023
The book is lean, easy to read and pretty funny, though the topics are by far not. It is a good overview of different trading options but not only, there are some very interesting historical insights too.
I only do not understand the bonus obsession and why an entire chapter (6) spent talking about quants salaries, if the book is supposed to be for a general audience. Make us jealous? Well nailed it, but not necessary to have especially mid book in my opinion.
I only do not understand the bonus obsession and why an entire chapter (6) spent talking about quants salaries, if the book is supposed to be for a general audience. Make us jealous? Well nailed it, but not necessary to have especially mid book in my opinion.
October 30, 2017
Excellent. The examples in this book are straight-forward and easy to understand. I'm not sure what to make of Chapter 6 though. It would have made more sense to move Chapter 6 towards to end. But overall, a great read.
December 10, 2022
Просто восхитительная книга про бизнес квантов. Актуальна для всех инвесторов кто захочет «нажиться» на волшебных формулах, графиках и теориях предлагаемых хедж фондами, банками, инвест консультантами и другими желающими поуправлять чужими деньгами «без риска». Не простая, но все сложное описано максимально просто. Шедевр
November 22, 2024
เกี่ยวกับประวัติศาสตร์การใช้อนุพันธ์ และอธิบายเนื้อหาวิชาการเกี่ยวกับอนุพันธ์ ที่ในการจัดการความเสี่ยง(หรือการเก็งกำไร?) โดยกูรูผู้เป็นอาจารย์สอนและอยู่ในอาชีพ Quant (นักวิเคราะห์เชิงปริมาณ Quantiative Analyst) ผู้เขียนยังเล่าถึงรายละเอียดของวิชาชีพของพวกเขา และยังยืนยันว่าทฤษฎีต่างๆรวมไปถึงแบบจำลองทางการเงินนั้น ใช้ไม่ได้ทั้งหมด!
May 26, 2021
A verbal and verbose talk of how mathematical finance, especially options pricing and risk management, is frequently abused and used to mislead (knowingly or unknowingly) the decision makers. While it is true and fun, it doesn't contain much educational or practical value.
August 27, 2017
É um ótimo livro. Os autores são totalmente brutais com respeito às suas críticas mas sem perder a leveza. É um livro com uma crítica bem clara a um abuso matemático em finanças que te faz rir.
Seria uma recomendação inicial para qualquer um interessado no assunto, mas os autores assumem implicitamente uma certa familiaridade com derivativos, o que dificulta. O livro também acaba, na minha opinião, meio abruptamente.
Seria uma recomendação inicial para qualquer um interessado no assunto, mas os autores assumem implicitamente uma certa familiaridade com derivativos, o que dificulta. O livro também acaba, na minha opinião, meio abruptamente.
July 9, 2017
Great by possibly the worlds most intelligent quant Who arguably makes the case against various aspects of conventional finance theories. In writing about one of the world's most complex fields, these two authors articulately give a reader insight and critique the validity of the financial world's models.
June 19, 2024
Once you can price an option on anything that has an uncertain future, you can build a hedging strategy around it and can therefore create any kind of derivative that your imagination permits. It's a sort of Rule #34 for the finance industry. Just like the other Rule #34, that means that you will create a lot of things that are nasty and ugly and are good for no one except the people who sell them.
But Mr. Wilmott points out properly that it is even worse than that. The Black-Scholes formula gives us a way to price options in publicly traded equities that depends only on volatility. In theory the same approach applies to anything that has a measurable volatility. Sounds simple. But what's the volatility? For publicly traded stocks, it's an easy number to determine on a historical basis, though perhaps not always obvious what the relevant historical period is. However, that's only the beginning of the analysis, since we don't want to know the historical volatility, we want to know the future volatility, and, for that, history is at best an approximation. There are ways to guess the future and to be more certain of your guesses if they are frequently updated and for shorter periods of the future, but there are limits on your ability to do that and there are no doubt forces beyond volatility that affect option pricing and that are not fully understood. For interest rates, it's even harder for a variety of reasons, and the more exotic the derivative the greater the difficulty of calculating the volatility and the greater the likelihood that the entire idea of volatility as a measure for option pricing doesn't work. But that doesn't stop the quants from applying formulas accepted in one context in a different area where they can package up a new product and sell it to the next sucker as a magical way to mint money without risk. You don't need to assume any sort of conspiracy or evil intent to see that this is going in the wrong direction, creating a world filled with products that are not very useful and trillions of dollars of unregulated artificial money that can evaporate in a market collapse.
Mr. Wilmott also proposes some ways to fix the problem or at least to go in the direction of fixing the problem. The first and biggest requirement is transparency, closely followed by simplicity, real regulation and small, carefully crafted transaction taxes. Derivatives are supposed to provide stability and market liquidity. To some extent they do, particularly the simpler ones that people can understand. They also allow securitization of all types of debt, which is probably a good thing as long as it is regulated. And I acknowledge that there is value in a free market that allows for individual choice, innovation and market pricing. Mr. Willmott suggests, rightly I think, that we can have most of the good things without most of the bad if we implement the reforms that he is proposing.
But Mr. Wilmott points out properly that it is even worse than that. The Black-Scholes formula gives us a way to price options in publicly traded equities that depends only on volatility. In theory the same approach applies to anything that has a measurable volatility. Sounds simple. But what's the volatility? For publicly traded stocks, it's an easy number to determine on a historical basis, though perhaps not always obvious what the relevant historical period is. However, that's only the beginning of the analysis, since we don't want to know the historical volatility, we want to know the future volatility, and, for that, history is at best an approximation. There are ways to guess the future and to be more certain of your guesses if they are frequently updated and for shorter periods of the future, but there are limits on your ability to do that and there are no doubt forces beyond volatility that affect option pricing and that are not fully understood. For interest rates, it's even harder for a variety of reasons, and the more exotic the derivative the greater the difficulty of calculating the volatility and the greater the likelihood that the entire idea of volatility as a measure for option pricing doesn't work. But that doesn't stop the quants from applying formulas accepted in one context in a different area where they can package up a new product and sell it to the next sucker as a magical way to mint money without risk. You don't need to assume any sort of conspiracy or evil intent to see that this is going in the wrong direction, creating a world filled with products that are not very useful and trillions of dollars of unregulated artificial money that can evaporate in a market collapse.
Mr. Wilmott also proposes some ways to fix the problem or at least to go in the direction of fixing the problem. The first and biggest requirement is transparency, closely followed by simplicity, real regulation and small, carefully crafted transaction taxes. Derivatives are supposed to provide stability and market liquidity. To some extent they do, particularly the simpler ones that people can understand. They also allow securitization of all types of debt, which is probably a good thing as long as it is regulated. And I acknowledge that there is value in a free market that allows for individual choice, innovation and market pricing. Mr. Willmott suggests, rightly I think, that we can have most of the good things without most of the bad if we implement the reforms that he is proposing.
June 15, 2020
“Bespoke Tranche Opportunity”
- If these words don’t make sense to you ; as Jared Vennett (Ryan Gosling’s character in The Big Short) would say “…Then no one’s paying attention” .
Paul Willmot and David Orrell – quants ex hedge fund Wall Street credentials ; expose the dark murky world of quant finance ; how the field metastasized into a cancerous tumor that now poses a threat to global finance and banking , wiping out savings of millions of Americans ,record bankruptcies and foreclosures ,shocks waves that bring down central banks of nations with reverberations felt for decades – Collateral Debt Obligation i.e. re-packaging of debt and Credit Default Swaps to short the American housing market ; that happened in 2007 and nothing has changed .
In 1970’s fundamentally changed portfolio risk management ; by Black Scholes Merton to value options and dynamic hedging – subsequent decades saw quants further creating complex derivative instruments for traders , which kept drifting further away from the underlying asset and reality .; Traders being incentivized to take even greater risks while quants developing math models out of thin air to justify their disillusions that market risk was totally mitigated – Only it is nowhere close to the truth .
Paul lays out how quants intentionally use complexity to create mystical aura all the while deliberately knowing their models are no longer is inline reality ; Lack regulation of the field since the bar of entry is intentionally kept beyond the reach of most people ; a vicious circle where self-aggrandizing individuals live in a bubble without having to deal with the ramifications of their creations ; No criminal indictments unlike in Iceland , but since when did we care about Iceland and Wall Street about ethics for that matter !
Paul Willmot and David Orrell – quants ex hedge fund Wall Street credentials ; expose the dark murky world of quant finance ; how the field metastasized into a cancerous tumor that now poses a threat to global finance and banking , wiping out savings of millions of Americans ,record bankruptcies and foreclosures ,shocks waves that bring down central banks of nations with reverberations felt for decades – Collateral Debt Obligation i.e. re-packaging of debt and Credit Default Swaps to short the American housing market ; that happened in 2007 and nothing has changed .
In 1970’s fundamentally changed portfolio risk management ; by Black Scholes Merton to value options and dynamic hedging – subsequent decades saw quants further creating complex derivative instruments for traders , which kept drifting further away from the underlying asset and reality .; Traders being incentivized to take even greater risks while quants developing math models out of thin air to justify their disillusions that market risk was totally mitigated – Only it is nowhere close to the truth .
Paul lays out how quants intentionally use complexity to create mystical aura all the while deliberately knowing their models are no longer is inline reality ; Lack regulation of the field since the bar of entry is intentionally kept beyond the reach of most people ; a vicious circle where self-aggrandizing individuals live in a bubble without having to deal with the ramifications of their creations ; No criminal indictments unlike in Iceland , but since when did we care about Iceland and Wall Street about ethics for that matter !
February 8, 2021
Quite wordy, and rather heavy, but not hard to grasp if you give it some attention. This book warns about the dangers of blindly relying on models when estimating and predicting financial instruments' value, risk, correlations, etc. The fact that the book is authored by quants themselves gives it plenty of credibility. Being in the field myself, I find the criticism of some practices easy to agree with. This book definitely contributes to what Ray Dalio calls "thoughtful disagreement".
One thing that perplexed me was a sudden jump in topic at the end of the book - while mostly discussing the dangers of blindly relying on models the focus suddenly gets shifted to another conclusion: therefore, here is what we can do to discourage short-term trading. While short-term trading of course tend to rely more on models, pretty much all the quant meltdowns discussed until that point were caused by rather long term (or at least medium term) investment decisions.
All in all, definitely a good read for anyone who wants to get their feet wet, or to reevaluate existing views.
One thing that perplexed me was a sudden jump in topic at the end of the book - while mostly discussing the dangers of blindly relying on models the focus suddenly gets shifted to another conclusion: therefore, here is what we can do to discourage short-term trading. While short-term trading of course tend to rely more on models, pretty much all the quant meltdowns discussed until that point were caused by rather long term (or at least medium term) investment decisions.
All in all, definitely a good read for anyone who wants to get their feet wet, or to reevaluate existing views.
November 25, 2019
3/4 of the books are very interesting with useful and relevant informations. The last part is about how to prevent the armageddon that would be triggered by the quadrillions in notional value of derivatives. It's seems too much to be honest.
I enjoyed very much the story of finance and a lot of other thoughts along the book, unfortunately they hate the game (HFT, manager exploiting models to increase their bonuses, all the corruption, etc) thinking they can change things.
This is the game, either play their rules or be prepared for a long life of disappointment because you can change the great scheme of things.
I enjoyed very much the story of finance and a lot of other thoughts along the book, unfortunately they hate the game (HFT, manager exploiting models to increase their bonuses, all the corruption, etc) thinking they can change things.
This is the game, either play their rules or be prepared for a long life of disappointment because you can change the great scheme of things.
October 15, 2017
Paul Wilmott is a researcher and quantitative finance consultant who's worked as a fund manager and academic while David Orrell is an applied mathematician and founder of a scientific consultancy. In this book, they look at the theories and formulae that underpin the quantitative finance models used by hedge funds and other financial institutions and explain why they're so flawed in a challenging but interesting read told in a breezy style.
September 14, 2020
Recommended by Ed Thorp, the book did not disappoint.
It clearly points out the biggest problem with modern finance, and especially quants and bankers.
Well written and entertaining, the book should be easy to read and understand for basically anyone.
Though I would love to see more specific details, math included as well as names...
It clearly points out the biggest problem with modern finance, and especially quants and bankers.
Well written and entertaining, the book should be easy to read and understand for basically anyone.
Though I would love to see more specific details, math included as well as names...
May 14, 2025
The second half of this book is really awesome. The author explains quite clearly what quants are and how they work, with a touch of humor. The dark side of the industry is also well covered.
I really liked the part where they compare banking regulation to the aviation sector, like the FAA—makes you realize how ridiculous the banking industry can be. LMAO.
I really liked the part where they compare banking regulation to the aviation sector, like the FAA—makes you realize how ridiculous the banking industry can be. LMAO.
August 17, 2025
A fun dive into the history of quantitative finance, focusing on how financial models were created and used, and how they sometimes went wrong. It's a fine book if you're curious about what a quant does and the people behind the Wallstreet firms. However, it's more of a narrative than a practical guide, so don't expect to walk away with actionable investing insights.
August 5, 2018
A cogent, highly accessible overview of the history of quantitative finance and economics, including the genesis of some of the critical flaws underpinning both systems, how these flaws helped to create the conditions that led to the global financial crisis, and a review of some potential remedies.
February 10, 2018
Very interesting overview of how quantitative finance got to where it is today. Loved the sarcasm and humor. Was hoping for a stronger finish...
February 18, 2018
Nice summaries of what financial engineering is, how it can lead to the next blowup.
March 9, 2018
I wish I could give this book 6 stars. Loved the sarcasm and humour.
December 30, 2019
Fun read, Wilmott has a great sense of humor and makes learning about dark pools interesting. I also bought Frequently Asked Questions in Quantitative Finance.
October 4, 2021
Confusing, uninformative, and too verbose
November 28, 2021
Notwithstanding his wise ass Wilmott is a class act who ought to be shortlisted for an OBE. Clearest introductory book I have read on markets, investment strategies and the nature of quants.
July 29, 2022
Brilliant! The book is filled with proper British banter; which is a plus.
January 13, 2018
This book explains how a group of people called 'quants' took over the financial markets and nearly destroyed the world of finance. You take a probability distribution and find that it works on the diffusion of gases, so you think to yourself, "Gee whiz, this model sure works for a nonlinear situation like smoke filling a room from a single source, but why can't I use this model to show how people buy and sell things?"
Well, Paul Wilmott and David Orrell explain that this is a dumb idea and why it is dumb. Human beings don't act like rational agents, motivated by their own self-interest, they are greedy and conniving idiots. Just because they have an advanced degree in mathematics doesn't mean they can tell the economy how to run itself. So the book talks about the main issues inherent in our financial system and goes over the histories of giant financial crashes and how the bankers and investors went home to their families and drank the wine of celebration for losing that much money. It's really rather frightening that such a naive group of people are responsible for this sort of thing, but well, it is hard to model something that accurately reflects a nonlinear system.
Take the weather for instance. Anyone could tell you a situation where the weather person got their info wrong, and you forgot your scarf or umbrella as a consequence. The weather is an extremely complex system with dozens of variables. I'm impressed that they can predict tomorrow's weather, to be honest. Now the same goes for finance. Anyone and their grandma will tell you that the stock market is about people buying and selling things. Since people don't behave rationally, we had to introduce some mathematics borrowed from a lot of different places. Most of it tries to model random behavior as I mentioned before.
Anyway, this book is really good. It even includes jokes and things. So if you want to know about that sort of thing, it isn't really heavy on the mathematics and the stories are interesting. Also, the book is not called Quantitative Seizing, it is called The Money Formula, as seen in the picture.
Well, Paul Wilmott and David Orrell explain that this is a dumb idea and why it is dumb. Human beings don't act like rational agents, motivated by their own self-interest, they are greedy and conniving idiots. Just because they have an advanced degree in mathematics doesn't mean they can tell the economy how to run itself. So the book talks about the main issues inherent in our financial system and goes over the histories of giant financial crashes and how the bankers and investors went home to their families and drank the wine of celebration for losing that much money. It's really rather frightening that such a naive group of people are responsible for this sort of thing, but well, it is hard to model something that accurately reflects a nonlinear system.
Take the weather for instance. Anyone could tell you a situation where the weather person got their info wrong, and you forgot your scarf or umbrella as a consequence. The weather is an extremely complex system with dozens of variables. I'm impressed that they can predict tomorrow's weather, to be honest. Now the same goes for finance. Anyone and their grandma will tell you that the stock market is about people buying and selling things. Since people don't behave rationally, we had to introduce some mathematics borrowed from a lot of different places. Most of it tries to model random behavior as I mentioned before.
Anyway, this book is really good. It even includes jokes and things. So if you want to know about that sort of thing, it isn't really heavy on the mathematics and the stories are interesting. Also, the book is not called Quantitative Seizing, it is called The Money Formula, as seen in the picture.
October 5, 2019
Ever sit on the opposite side of a table w/ a quant and think "that person is a parasite ?", but just couldn't exactly prove it? Curious to know the inside story of the Quant work/career process, but w/ a dash of British wit? Do you have some basic probability background (know what distributional parameters are, and can follow simple logical arguments), and would like a fairly accurate perspective of how financial modellers exactly misappropriated certain statistical concepts (the Copula) to make absurd assumptions that caused them to misestimate risk of default for instruments like CDOs? Then this is the book for you!
From a nice, brief history of statistical analysis of financial data from games of chance, to more recent "innovations" of stochastic calculus to price exotic contracts, this book covers the gamut w/ the critical, but learned eyes of the authors. Written by Wilmot and, a well know financial quant and academic, the book goes through several interesting topics, including the degree of bull s**t for several well-known job titles for quants and explains what they really do, from "developer", a junior developer (code monkey), quantitative researcher etc.
The book is pretty blunt and direct with respect to Wilmott's agenda: Financial modelling is mostly bull s**t, and the economic theory that its couched on is more bull s**t. Unlike other pollyanna-ish books w/ a similar angle, Wilmott goes more technical to address specific issues with specific assumptions in the mechanics of some key models.
I think this is a great book for general numbers nerds, to someone who may want to break into this field w/ both eyes open. Conditional recommend.
From a nice, brief history of statistical analysis of financial data from games of chance, to more recent "innovations" of stochastic calculus to price exotic contracts, this book covers the gamut w/ the critical, but learned eyes of the authors. Written by Wilmot and, a well know financial quant and academic, the book goes through several interesting topics, including the degree of bull s**t for several well-known job titles for quants and explains what they really do, from "developer", a junior developer (code monkey), quantitative researcher etc.
The book is pretty blunt and direct with respect to Wilmott's agenda: Financial modelling is mostly bull s**t, and the economic theory that its couched on is more bull s**t. Unlike other pollyanna-ish books w/ a similar angle, Wilmott goes more technical to address specific issues with specific assumptions in the mechanics of some key models.
I think this is a great book for general numbers nerds, to someone who may want to break into this field w/ both eyes open. Conditional recommend.
October 11, 2018
My second book about stock trading or financial sector. I didnt finish the first one as I was lost and didnt have any motivation to push untill the end. As someone who is very blind about this topic, I need some easy to read book yet deep enough to give surface knowledge. Which I find it in this book.
I was still lost with many financial terms and abbreviation, but the way author wrote the book allowed me to understand the bigger picture.
Good to read for new stocks investor that keen to understand what are other hiden factors that might impact to the stocks price - mostly non common sense reasons!
I was still lost with many financial terms and abbreviation, but the way author wrote the book allowed me to understand the bigger picture.
Good to read for new stocks investor that keen to understand what are other hiden factors that might impact to the stocks price - mostly non common sense reasons!
Displaying 1 - 27 of 27 reviews