Message Font: Serif | Sans-Serif
No. of Recommendations: 1
For one it's a Nobel Prize winning piece of statistical mathematics that produces an answer that no one could figure out before (that does not necessarily mean that it is THE correct answer).

Briefly, the model assumes that the most likely price of a share at any time in the future is exactly the same as the price right now. How right can that be? To give this supposition some validity they actually use a normal distribution about the current price. Except that share prices are not normally distributed! They follow a power law distribution, like earthquakes. The normal distribution is adjusted by the stock's volatility except that no one can know what the volatility will be in the future. So they use history.

What is the Black-Scholes option pricing model? It's a method whereby you use an improbable assumption, the wrong distribution pattern adjusted by an unknowable volatility factor to come up with a precise price for an option. For that you get a Nobel Prize!


Denny Schlesinger
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.