Tuesday, November 25, 2008

The Probability That Kiyoshi Ito Will Design Anymore Equations That Robert Merton Will Use To Blow Up A Hedge Fund Has Dropped Significantly

From NYT (my emphasis):

Kiyoshi Ito, a mathematician whose innovative models of random motion are used today in fields as diverse as finance and biology, died Nov. 10 at a hospital in Kyoto, Japan. He was 93.

His death was confirmed by his daughter, Junko Ito.

Mr. Ito is known for his contributions to probability theory, the study of randomness. His work, starting in the 1940s, built on the earlier breakthroughs of Albert Einstein and Norbert Wiener. Mr. Ito’s mathematical framework for describing the evolution of random phenomena came to be known as the Ito Calculus.

“People all over realized that what Ito had done explained things that were unexplainable before,” said Daniel Stroock, a professor of mathematics at the Massachusetts Institute of Technology.

Mr. Ito’s research was theoretical, but his models served as a tool kit for others, notably in finance. Robert C. Merton, a winner of the Nobel in economic science, said he found Mr. Ito’s model “a very useful tool” in his research on the evolution of stock prices in a portfolio and, later, in helping develop a theory for pricing stock options that is used on Wall Street today. Mr. Ito, he said, was “a very eminent mathematician.”

Actually, Ito appears to have used his theoretical equations properly in the world of theory and not incorrectly in the field of finance. Robert Merton and Myron Scholes have given Ito a black name by using the equations he designed, inappropriately. They blew up Long Term Management Capital together, and Scholes is on his way to blowing up another hedge fund.

There are no constants, zero, in the field of human action, thus no equilibrium equations can be designed. What the likes of Merton and Scholes do is assume some variable is a constant, attempting to defy Wenzel's Observation #1.


No comments:

Post a Comment