The Equation That Beat Wall Street
Video Overview & Insights
How the Black-Scholes/Merton equation made trillions of dollars. Sponsored by Henson Shaving - Don’t forget to check out http://hensonshaving.com/derek and enter code “derek” at checkout to get a FREE pack of 100 blades (2+ years worth) with the purchase of a razor. Just make sure both products are in the cart for the code to take effect.
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There is no random price movement ...
If you’re looking for a molecular modeling kit, try Snatoms, a kit I invented where the atoms snap together magnetically - https://ve42.co/SnatomsV
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A huge thank you to Prof. Andrew Lo (MIT) for speaking with us and helping with the script.
We would also like to thank the following:
nice video
Prof. Amanda Turner (University of Leeds)
Owen Maher (Electrify Video Partners)
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References:
How can old journalists understand, let alone comprehend something. Journalists.
The Man Who Solved the Market: How Jim Simons launched the quant revolution, Gregory Zuckerman. Penguin Publishing Group. - https://ve42.co/GZuckerman
The Physics of Finance: Predicting the Unpredictable: Can Science Beat the Market? James Owen Weatherall. Short Books. - https://ve42.co/FinancePhysics
Good, I am glad he lost his slave ship money.
The Statistical Mechanics of Financial Markets, J.Voigt. Springer. - https://ve42.co/Springer
Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of political economy, 81(3), 637-654. - https://ve42.co/BlackScholes
All the dumb doods were hella jealous that the smart people were making bank, so they just created tax laws that helped rig the game (because the dumb people always seem to either be politicians, or trust fund babies born with a silver spoon in their mouth & a politician in their pocket). By systematically deducting investment losses from investment gains, you generate an asymmetric return stream known as Tax Alpha (no relation). Studies from eg MIT show you can add an average of 0.85% to 1.10% in annualized excess returns over a passive strategy. But that's a starting point, not the end game.
Cornell, B. (2020). Medallion fund: The ultimate counterexample?. The Journal of Portfolio Management, 46(4), 156-159. - https://ve42.co/Medallion
Images & Video:
Subtitles are not synchronized.
Ed Thorp on The Tim Ferris Show - https://www.youtube.com/watch?v=CNvz91Jyzbg
Jim Simons on TED - https://www.youtube.com/watch?v=U5kIdtMJGc8
There's a great book on this topic titled "Fortune's Formula" by William Poundstone.
Jim Simons on Numberphile - https://www.youtube.com/watch?v=QNznD9hMEh0
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@Veritasium The subtitles/closed captions for this video are way out of sync
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When i took a pde course during my grad i was always amused how the heat equation could be related to Stock prices.
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Directed by Will Wood and Derek Muller
Non wage income must be taxed.
Written by Will Wood, Emily Zhang, Petr Lebedev and Derek Muller
Camera operation by Raquel Nuno
safest asset .. US treasury bonds. 😂
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Edited by Jack Saxon and Trenton Oliver
Is it me or susbtitles gone bonkers?
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Why did the video go black all of a sudden with just the Ve logo on it??
Music from Epidemic Sound
LOL. The equation that has destroyed the financial system over and over again except for bailouts which the "uninformed" paid for. Nobody factors in the fact that, when more than one player uses these models, they cancel each other out. The real way to beat the market is be a big enough player that you can push the price around and force your options to pay off reliably. Or to have more information than others about the surrounding environment, known as "macro".
More User Perspectives
With this one I know I'm dumb
@UngadAvciWith this one Newton's lost for me
@UngadAvciStock markets are just a modified ponzi scheme
@adef-pj1dujfyi the closed captions are badly desynchronised
@ChocolatesAfterDark"This is diffusion"...that is naming a phenomenon, not explaining why it occurs. 13:06
@davidgillespie9256I despise stock markets and capitalism, but this is really scientifically interesting :0
@Emma-ol3edSimmon's Medallion Fund is a cover to farm and retain the world's best Physicists within the US.
@drives9965Very neat video. I lived in Chicagoland for a bit & visited CBOE a few times including a tour of the trading floor. There weren't crowds of folks on the floor even though volitility was high. I asked the guy at the IBM pit about using the Black Scholes model & he showed his analysis on his tablet PC which had wireless data connections. The trading floor went fully automatic several years ago. I'm sure it will get more exciting with AI.
@dr9205I spent years working on the floors of F&O. First I was so chuffed and proud to be there, being part of the big game.. I worked for a few Tier1's across the globe, but I can remember being on the floor in London when a leading bank was fined $16b.. I turned to my boss and said that's got to sting and he replied. No Chance, we knew it was coming, we had that money in a working account for two years and it doubled its value, so it paid for itself.. Before long, I hated it, every stinking greedy little part of it and how the entire world plays to its song... Not that I liked May as Prime Minister, wrong politics for me, but she didn't screw us.... The global banking system did, and no one even nattered an eyelid at the route coarse. Burn it all! You want to know why the third world exists in 2026, i jut told you..
@MM4F@4:00
@nonenone9493And here we are again.... every time my youtube gets left playing I come back to one of your videos.... starting to think its not coincidence..
@BjscribbenJust found this video. What a fantastic video. I’ve been trading for 10 years and self taught quant for 9. I don’t start making money until I stopped trying to predict and use Hidden Markov Models and generating the right synthetic data for Monte Carlo. Essentially, it’s all a coin flip. Mathematically adjusting RISK from start to finish while adjusting while in trade. I stopped following know rules to adjust while in trade and probabilities become my gold mine. This is a great video. Really, really good video
@landdunbreakable934215:25 I really can't understand this. Yes, it seems easier to figure things out in the past than it is now, I know that's a misconception, but how could something as intuitive as remembering the cards played in blackjack not have been discovered until the 1950s? I mean, knowing the cards played is practically the biggest trick in the game.
@prodbeckoGreat video, but Derek, the last sentence is wrong: [...then we will have a perfectly efficient market, where all price movements are [remove "random"; insert "predicted"].
@willferguson2700Fantastic explanation, thank you!
@AdamGordon-o1sJewpropaganda
@lorezampadeferro8641This was super helpful, thanks!
@doggyl3-o7vWhy is the sponsored ad a seperate video now , crazy
@sumitbhuiaGreat episode, but the CC seems to be from another episode on playing cards…🤔
@jennifermatascik7394cool!
@marcomonti5758How did bro time travel to 2026 two years ago 😂
@IvanJumbo-f4xThis is a classic case of survivors bias. Simons nearly went broke multiple times. It all looks great in retrospect.
@sgrant39Why is no one pointing out the fact that since stock price cannot be negative it cannot follow normal distribution. It follows log normal distribution. The returns on stock is normally distributed. 11:09
@MonikaNareshkumarDubeyIsaac newton really experienced the “ ANDDDD ITS GONE” moment before anyone
@Mr10178Gambling but heavily favoring those that can leverage it.
@Hanser19Prices will never be truly random when random events by humans exist.
@GodzillaGoesGagaThe last line I kind of disagree with, using inefficiencies might create a new inefficiency
@solidbroadcast3053bascially, if you can observe every air particle ever, you can predict turbulance
@nopepart2Why are the captions COMPLETELY DIFFERENT from the spoken text?
@HallGaltFell asleep. Guess I’ll always be broke.
@Photoshop729I made an AI that can predict the market I don't need to be a math genius. :)
@lokied-qc8ftAre they not betting on the stolen wages of workers though? Like math is great but if if describes suffering of the poor and theft by the rich then what’s the point?
@wondermoreforever