stefalb

Taleb vs Merton, Cont.

As a long time futures and options trader I have known for a long time that the volatility part of Black-Scholes is badly flawed and discredits the entire formula. Past performance is no guaranty for future performance and a global dynamic economic system totally out of balance makes Black Swan events much more likely. Specific risks can be minimized by modern portfolio theory but systemic risks, as we have seen in 2008, can not at all or only with great difficulty minimized. Arguably the more specific risk is minimized by institutionalizing it in the system, the more systemic risk increases, the more volatility becomes unquantifiabel, and the more Taleb is right!!!