Paul Wilmot -Buffett and Derivatives: Enthusiasm, Anger, Disbelief, Acceptance
Introduction (Via Paul Wilmott’s Blog)
Denial, anger, bargaining, depression, acceptance, according to Elizabeth Kübler-Ross the five stages of dealing with personal tragedy. I wonder if there’s something similar we are going through with financial derivatives? If so, I think Warren Buffett is at the anger stage. “If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it,” is his view on investing, famously calling derivatives “Weapons of mass destruction” a few years ago. I sympathize, and I speak as one of the mathematicians who works with derivatives for a living.
3 Stages Of Using Derivatives:
1. Naive Enthusiasm
2. Righteous Anger
3. Confused Disbelief
Additional Excerpts (Via Paul Wilmott’s Blog)
Buffett’s right-hand man, Charlie Munger, has said about higher mathematics in finance “They teach that in business schools because, well, they’ve got to do something.” Now that really hits the nail on the head. When your competitor university across the river is charging 50, 60, 70 thousand dollars for a one-year Masters course in Financial Engineering, what are you going to do? Are you going to say you don’t have any faculty that understand derivatives? Hell, no. You are going to get your smartest mathematicians together and make up a syllabus. Are your 23-year old victims, sorry I mean students, going to know any better? In 2000 I warned about the dangers of a “mathematician-led market meltdown” after seeing what had happened at LTCM and how identikit risk managers were being churned out from Masters programs, and how Groupthink was beginning to dominate risk research and derivatives valuation. I sympathize totally with Warren Buffett and Charlie Munger.