The Money Formula

Introduction

“How about the scandalous stories of thousands of families with small and medium investments who have been ruined because of the greed of financial institutions in the United States and Europe. Look at the evictions, ruined families, and suicide attempts caused by the financial crisis of those who have failed to control the capital markets or the prices of raw materials. ¡Vaya mierda!”¹

—Response to the survey question: “Do you have any outrageous or hilarious stories that you think ought to be in Paul and David's new book? Share some details, please!” at wilmott.com

“The truth about their motivation in writing.”

—Response to the survey question: “What topics should definitely feature in the book?” at wilmott.com

The global financial crisis that peaked in late 2008, and whose aftershocks have yet to fully dissipate, was the culmination of many years of dubious financial practices. If carried out alone they might have caused only localized harm, but they became aligned in the way that only the most dramatic of astrologers can dream of: a quadrillion dollars in complex financial products that no one understands; risk-management techniques that hide risk rather than decrease it; moral hazard and dangerous incentives; lack of diversification; regulators that are oblivious; mathematicians acting as psychological enablers. It was a story where the naïve, the negligent, and the downright nasty all pulled together in seizing as much as possible for themselves while almost ...