If we are to change our world view, images have to change. The artist now has a very important job to do. (S)he’s not a little peripheral figure entertaining rich people, (s)he’s really needed.
– Václav Havel
The Audacity of Logic
The entirety of this book is summarized in the following phrase:
If TIME (T) in financial prices ≠ ∞,
then, The Black Scholes Merton Financial Regime is PROFOUNDLY WRONG,
and $900 TRILLION worth of financial assets must be re-priced.
NOTE: If you can prove that infinite financial time exists, then you may be able to win $20,000 (plus a $5,000 bonus if you ever taught at Harvard). If you find it hard to believe that infinite time exists in financial prices, then please contact your investment adviser, central banker, congressperson or national financial policymaker and ask them to stop the Black Scholes Merton madness.
As creative people, as entrepreneurs, and as human beings, we are lucky if there comes a time in our lives when we get to either fight for something that we believe in, or choose to move on. This book and art project, INFINITY is the ENEMY, is my attempt to do both.
In this book and art project, you will see Nobel prize-winning economic theories printed onto elegant Tesla automobiles and onto equally elegant toilet seats from Walmart. You will see Schumpy, the huge puppy dog, dressed as a financial revolutionary. You will see a massive, overstuffed bra (size 57-J) emblazoned with golden infinity nips. You will see beautiful milky-white marble tablets enticing you to confront the financial status quo. And, you will see me standing naked before the statue of John Harvard challenging Harvard’s faculty to rise up and defend the most powerful, the most mistaken, and the most damaging financial model in the history of economics, the Black Scholes Merton Model. The Black Scholes Merton Model rules the pricing of over $750 trillion of financial derivatives securities. BSM is often blamed for creating the massive complexity of today’s financial system and for perpetuating the financial instability that derivatives force upon our financial landscape every day.
If you think that Nobel laureates in economics are sacred cows and that their theories shouldn’t be aggressively challenged, then this may not be the book for you. If you believe that Wall Street and global financial markets are currently operating in good health and with strong integrity, then this may not be the book for you. If you believe that the battle to repair the financial landscape can be won with hugs and kisses, then this book is not for you. And, if you do not understand that all entrepreneurs (especially the greats like Elon Musk, Richard Branson, and Steve Jobs) must engage in a constant, unrelenting attack on the status quo and its protectors, then this book is definitely not for you.
But, if you learned something about your own humanity when Rocky Balboa endured 15 rounds with Apollo Creed, then you may like this book. If you share Michael Lewis’s outrage about Wall Street and the way technology and financial complexity help an elite few, then this may be the book for you. And, if you believe in the power of art to create social change, then please read this book.
This book is aggressive, sometimes crude, and always unrelenting in its attack on the foundation of modern financial theory as contained in the Black Scholes Merton Financial Regime (BSM). The grotesquely complex $750 trillion financial landscape that BSM has created is so huge in its reach and so insidious in its power that it can only ever be overturned with aggressive confrontation and relentless focus on the fallacies that prop it up. This book uses art, art criticism, and financial intellectual criticism to attack the BSM Regime. While the artwork is witty, fun, and far-reaching, the style of this book may be raw, unpolished, and mission-focused.
This New York Art Book Edition of INFINITY is the ENEMY is the second of three editions. It contains much of the hard punching and painful contractions that birthed the emotional Miami Art Book Edition in January 2014. When the first edition landed on the steamy shores of Miami, perhaps it was screaming in pain about how difficult it was to finally express into the world something that had been carried inside for too long. But, now that my creation is out in the world, the new task is both to nurture it and to begin a healing process of my own. This requires compassion. It also requires the intellectual and emotional stamina to protect the newborn book and artwork until they can live on their own. Now that we are separate, I must help this book and artwork find its place in the world. And, I must help myself find my place in a world where I am newly independent.
The Miami Art Book Edition made a clear and passionate expression of the entrepreneurial hurt that was incurred by me and my former company, Economic Inventions LLC, as a result of poor scholarship by the academics Josh Lerner (Harvard Business School) and Adam Jaffee (Brandeis University). In 2004, they co-wrote the book Innovation and Its Discontents, which directly attacked critical patents that were at the foundation of our company. Their unfounded and careless criticism of our patents cast a dark cloud over our effort to promote innovations that would simplify financial markets. In 2012, with great financial loss to everyone involved, Economic Inventions LLC was liquidated. In Chapter 8, this book still sets the record straight by aggressively deconstructing Jaffee and Lerner’s woefully weak scholarship. However, the more inflammatory comments that I had in the opening of the Miami Edition are now gone. The hurt has been replaced with the dark humor and the absurdity that their book created for me and my colleagues. An apology from Jaffee and Lerner would be nice, but I am moving on.
I remain baffled that, in 1969, Paul Samuelson and Robert C. Merton succeeded in building the entire edifice for modern financial engineering on the intellectual quicksand of “self-fulfilling prophecy.” This is covered in Chapters 4 and 5. The concept of “self-fulfilling prophecy” was first vilified in 1949 by the famous sociologist Robert King Merton, who was the father of the economist Robert C. Merton. The senior Merton insisted that the use of “self-fulfilling prophecy” was anathema to rigorous scholarship. He went so far as to claim that in the social sciences, “self-fulfilling prophecy perpetuates a reign of error.” I invite all readers to decide for themselves about the validity of the self-fulfilling maneuvers that Paul Samuelson and Robert C. Merton used in 1969 when fabricating their options pricing boundaries that still rule nearly $750 trillion worth of financial markets. Please take time to analyze this. It seems clear to me that all financial markets continue to labor under the wasteful distortions of the “reign of error” that the Black Scholes Merton opinion injected into our financial landscape over 40 years ago.
Examining the consequences of “injecting” something into a new and disconcerting context is very much a part of this project. In 1917, when Marcel Duchamp injected a porcelain urinal into the art landscape, he marked a moment in time when a stale art world was challenged to reconsider its most fundamental beliefs about what constituted art. He named this artwork Fountain and signed it with the name R.Mutt. Duchamp’s brazen and cynical move spawned and still spawns vast amounts of artwork that many conventional art viewers cannot bring themselves to accept as valid and legitimate art.
In 1973, when the Black Scholes Merton Model injected physics into economics, BSM created a movement that has exploded into today’s wildly complex financial system that is nearly impossible for anyone to understand.
In 2013, the brightest minds at J.P. Morgan Chase did not understand the $6 billion loss that their London Whale was cooking up for their bank with complex derivatives. Today, virtually every major bank CEO lives in fear of the tangled web of financial risks that lurks within their banks’ madly complicated derivatives portfolios. Like the audacity of Duchamp’s urinal, Black Scholes Merton’s brazen injection of physics into economics spawned vast amounts of hyper-complex financial derivatives that many do not accept as valid and legitimate financial creations. It was Warren Buffet himself who referred to complex financial derivatives as “financial weapons of mass destruction.”
Would art be better off if Duchamp had not forced the alien mysteries of his urinal into our art world? Would financial markets be better off if Black Scholes Merton had not forced the alien complexities of physics into our financial world? Of course, the analogy between art history and financial history has limits. Art is art, and all art is a human creation. While art can help us understand ourselves and our world, art does not claim to describe strict laws about our world. Physics is a natural science, and all natural sciences are not a human creation. Natural sciences try to discover and explain the laws and rules that we can expect from our natural world. Some thoughtful physicists like Lee Smolin even question whether there are many hard and fast laws in physics either.
So, what is economics? Economics is often called a “social science.” Along the continuum of human knowledge, economics exists somewhere between “The Arts” on one end, and “The Sciences” on the other end. But, like art, all economic relationships and all financial prices are human creations. No economic laws pre-exist in the physical world waiting to be discovered by scientists. This is why the use of physics in financial theory is so profoundly wrong. It is only through our social interaction in markets that we are ever able to discover and constantly refresh the prices and economic relationships that only humans can create. This is why prices are beautiful.
So when BSM injected physics into the social science of economics, how did it change the content of economics? And, how did the imposition of physics into financial markets change the context and functioning of financial markets? If Duchamp’s use of a urinal can be valid artwork, can BSM’s use of the heat-transfer equation from physics be valid economics?
Just as the constant increase of entropy is the basic law of the universe, so it is the basic law of life to be ever more highly structured and to struggle against entropy.
– Václav Havel
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