@@pauls3075In my case it has done the opposite lol I already didn't want to risk any money in trading or speculation. This confirms that it was the right gut feeling.
@@acmhfmggru that is rather non-sensical. You can go as hardcore in mathematics in finance as you like, given that you are trying to model something that can't really be modelled, as long as it makes financial sense. You can't linger on for too long on things that don't work. Also, the video said nothing much about options pricing other than what you read in a financial mathematics book in the first 2-3 pages. Try pricing options with more exotic pay-offs or synthetic products... this is where it gets hot. Also a background in stochastic calculus, probabilities and statistics and measure theory is needed and that takes a good 2-3 years to get to in a maths undergraduate degree.
Veritasium inspires me.. My parents said if i get 70K followers They'd buy me a professional camera for recording..begging u guys , literally Begging..
Unfortunately, Prof. Jim Simons passed away today (May 10, 2024). As a graduate student in math department of Stony Brook University, I came to know this earlier. He's genius of a person. Rest in peace, rest in knowledge. I always wanted to meet him but the nature has other plans. Om Shanti.
He’s the reason I started my own quant firm. Passed hours before my 22nd birthday. Knew many fraternity brothers of mine at SBU. Always heard great things about him. RIP sir
Because most finance/econ channels are literal scammers and are not trying to educate anyone. The more money there is to be made in a field, the more awful people it attracts, which is why the finance and health niches are by far the worst on RUclips
Science is a method or language to read and understand the easter eggs and messages our creator prepared for the modernists and "people of knowledge," so that they may understand, that there is no doubt about the truthfulness and the divinity of His final revelation - the qur'an.
My portfolio for the past 30 years has always been self managed and I own 3 shares of Berkshire Hathaway Class A stock (BRK:A) which I bought in at about $17,000 during the mid 90s, I'm currently liquidating some of these positions to incoporate new Gen. Stocks, but am I better off re-investing into Gold as it seems stocks are a little too unstable right now
`I'm new to cryptocurrency and don't understand how it really works. how Can someone know the right approach to investing and making good profits from cryptocurrency investments?
As a beginner investor, it’s essential for you to have a mentor to keep you accountable. Myself, I’m guided by Ryan Donald.. A widely known crypto consultant
Yeah!, Ryan was my hope during the 'bear summer' last year. I did so many mistakes but also learned so much from it, and of course from Ryan Donald. He is my number one source when it comes to crypto and TA.
Wow! As somebody who used to work with derivatives in my job I can say this is hands down the best, most accessible explanation of the Black Scholes equation that I've ever seen. This channel makes teaching look easy.
Exactly what I meant by my other comment! Videos like these are modern tools that distill very complex topics into something far more easy to absorb, assuming a certain level of prerequisite knowledge of course. It's something we wish we had when we were going thru uni learning all this stuff through 300 page thick text books and just a tonne of b&w charts that are somehow meant to be relevant to an 19yrold back in the day... and these days it's just available and FREE*! .... (* subject to sitting thru a few ads and message from our sponsors lol)
The industry does not use the Black Scholes nowadays.. I really thought he would talk about the problem of fat tails, that is assuming normality in the distribution for the change in the stock price, events like 2008 are almost impossible but indeed should be not more than improbable. Also, and I do not know if he noted it in the video but BSM is not stochastic, it is deterministic.
@@EliudSibuor I haven’t. I’m a mathematician at heart, but I never had the stomach for active investing. I spend my time learning skills that will earn me a good salary, and I put money in an index fund.
The style of this video is brilliant. It reminds me of a film where there are multiple plot lines and these seemingly unrelated subplots satisfyingly come together at the end.
There are plenty you just don't understand anything that's even an inch above the layman's terms. Videos like this just exacerbate the problem by making people think they learned something when in reality it oversimplified so much stuff that it's borderline wrong.
@@shivanshu6204 How do you come to knowledge of this kind of information in the first place? You learn the basics, in oversimplified terms, and graduate to more advanced understandings of concepts. Going to university and getting formal education is one way to do this. However, that’s inaccessible for people who might be past that stage in life or are focused on another major but have interests in this subject. And there certainly are other channels that bring to light information from these subjects, but in much too complicated terms for a beginner to understand, which hurts the field’s credibility in the public’s eyes in being understandable. However, this channel has been able to bring the basic concepts of these subjects in simple and understandable terms, something everyone can gain value from. Yes, whilst some who are inexperienced might make false conclusions from this info, in general, the video is accomplishing its goal of bringing this information to the public in understandable but accurate description. It is certainly accurate and well researched, and if there have been errors or misconceptions in a video of this channel, other channels and the educated public in the field have brought to light such errors (like in his video on electricity). The purpose is not to give people to most precise information, but it is to spark a curiosity in finding more precise information, and this information is not oversimplified at all, it is simply not all the information and explanation, which is what the person themselves must find on their own. The conclusion here is “yes”: you do think you are smarter than you actually are, this conclusion being derived from the fact that you fail to understand the purpose of this channel and its videos.
This channel deserves some sort of a an award or recognition on RUclips for being so informative and engaging. The amount of detail is astounding. RUclips should start rewarding this level of professionalism and dedication.
Relax dude, this isnt some revolutionary way of teaching/giving out information. You probably havent had good education prior to this so this is your peak moment.
As a pure math undergrad turned math teacher turned stats masters turned actuary... just wow. I had a smile across my face throughout as you connected the dots across the history of this topic. Fantastic as usual
Yo, I have a very similar back story and am super interested in actuarial science. Would you be opposed to virtual communication about your development into an actuary?
I have a finance degree, and this 30 min video explained this all far better than any class I've ever taken. Bravo to you for succinctly explaining an incredibly difficult concept to grasp in such a short format. Also, those comments by Professor Lo towards the end are eerily similar to that dinner scene in The Big Short with that synthetic derivatives manager. Gave me the chills. Only this time, instead of derivatives on the residential mortgage market, it's the commercial mortgage market as well as municipal bond market. Both of those are in tremendous upheaval and market distress and will be for the next few years. Any derivatives riding on those underlying financial instruments are toast.
The funny way he responded in terms of the size of the market and it provides stability when things are going well and then didn't address what happens when things go badly, suggests the downside risk is being ignored or is not understood. What will happen when there is the enevitable downturn?
In case Derek or anyone on his team reads this, $100 in the medallion fund does not compound yearly at 66%. It yields 66% per year. The size of the medallion fund is limited by the size of the options market. If the fund grows too large, their edge experiences diminishing returns. By this fundamental limitation of their strategy, the fund only scales with the efficacy of their edge and the rest is liquidated for employees and original shareholders. If it was truly compoundable, then the fund wouldn't be closed and an efficient market would infinitely allocate to it until itintroduced price distortions that arbitrage the edge. The initial statement about $100 becoming billions in decades is not true.
@@Luminaria999 He literally just explained how the money doesn't compound like that. While, the 8% (10%) you are talking about does describe a compounding effect. There is no comparison to make between the two because they don't mean the same thing.
They make it complicated in order to obfuscate truth - you sell and buy things you do not own. Imagine you selling car that is not yours. You would land in jail. But rich and powerful, belonging to certain ethnic group, get bailed out if they screw things up.
Veritaseum videos are like a Nolan movie. It goes through multiple different story lines, and finally converges into one thing that finally lets you make sense of the whole story.
Derek, I am so impressed with the quality of teaching and communication of this video. You have every right to be very proud. I’m 64, consume huge amounts of information daily and am rarely impressively struck by the lucidity and insights and especially with the order they are presented. It’s as if you could read my mind. Each time as I began wondering something, you presented that exact thing - as a question or factoid. Friggin’ marvelous. ❤👍👍
Worked in the OTC derivatives industry for years, and did many training classes. A great video. As an interesting personal note, I once worked with a quant group who had Fisher Black's old office, which had been turned into a "fish bowl" type group work space. It was a great partner's corner office, but no one would take it, hence being turned into a team office. He had only died recently, and no one would take it, as it would have been viewed as pretentious. Such was the esteem he was held in.
@@crimpers5543humans often do things out of respect for those that have exited their field after leaving a lasting impression. We retire jerseys and player numbers on professional teams for great athletes. We make memorial benches at the local golf course that nobody will realistically use and plant trees with a placard to honor those who were important to local parks or communities. A girl in my high school passed away suddenly, and her assigned parking space at the school remained untouched and reserved for her for the rest of the year, even though all parking passes were sold out and there was a decent backlog of those wanting one. It may technically be beneficial to be devoid of human sentiment, but it doesn’t make you cool and being cold about this kind of thing certainly isn’t something to brag about.
Heads up: when we use the terms "American vs European" options we do not mean that only in America are there options that you can exercise whenever. Most options can be exercised before the set date (=American), even in Europe. Over-the-counter options I believe are more often European option. The terms come from the origin of where these options were initially prevalent but both styles can be found around the world.
1:00 Just heard about Jim Simons' passing today (10th May 2024). I recalled watching his contribution to hedge funding from this channel about two months ago. I came here to appreciate his contribution once more. RIP Legend!
Yea, and add this with the fact that the market through Uniform Comemercial Code is set us so banks actually have a claim over your "owned" stocs in a crisis. Lehman Brothers became case law. Search for "The Great Taking".
Pop sci often gets the heat for not really being serious math/science. Good to see Derek not shying away from showing more equations and instead making a whole video on one.
The issue is that the math may be a smoke screen for evading taxes. Given the secretive nature of these funds no one really knows the inner details. It's a little problematic that Derek is presenting only one explanation.
Thats how I feel about Kurzgesagt videos. They are like, _your immune system is an army of tiny warriors who missed lunch._ Bro what? Just tell me what a T-cell is.
One lesson I've learned from millionaires is to always put your money to work, no matter how small. Even investing €200 per month can compound to tremendous wealth over decades. The key is to keep going!
My advice for who wants to grow financially this year, invest. Saving is good, but investing elevates your finances. Thanks to my financial advisor, my portfolio is thriving, and l'm proud of last year's decisions.
People often don't realize how important financial advisors are. Data from the last 50 years shows that people who work with CFAs usually earn more than those who don't. I've worked with a Adviser for 7 years, and now I have a $2 million portfolio.
I've stuck with ''Julianne Iwersen Niemann" for some years now, and her performance has been consistently impressive. She's quite known in her field, look her up.
you have such a gift to explain these things. Your video on Fourier transformation helped me immensely in my PhD dissertation actually (i still had to find "legit" sources cause a veritasium video doesn't count, but I understood it better from you than from any "proper" papers). Please never stop making these, you explain complicated things so well
@@element4element4 Microplastics in industrial wastewaters. I'm an environmental chemist. We used Fourier transform infrared spectroscopy to detect microplastics.
Dude, I know it has been 2 months already and maybe you are not even German speaking. But if you are I highly recommend the mathematics text books by Lothar Papula called "Mathematik für Ingenieure". He helped me understand most mathematic principles and I am very bad at physics and mathematics. Brilliant books and they even have exercise books. I was actually able to do a Fourier transformation on my own at the end of the semester.
It's worth mentioning that Merton and Scholes, who were champions of the efficient market hypothesis, were part of the board of directors of a hedge fund called Long-Term Capital, which ironically sought to exploit market inefficiencies to make money. The fund ended up collapsing less than 4 years later and receiving a huge bailout. In the years before, Ed Thorp's fund was making record profits until it was dismantled by the US gov. Source: Fortune's Formula, very interesting read
came here to say this- LTCM[sic] is my go-to example of the difference between theory and practice.. also, didnt buffett make a giant bet explicitly against black-scholes? a huge long term short put position on the s&p? feel like if he had taken a bath on that it would have made the news.
@@theupsonThe thing about buffet is that he evaluated sticks in a value perspective (what is it worth) which means with a lot of work he will be right and can take positions on a few stocks, whereas black-sholes will be right most of the time for every single stock. So you can beat black-sholes but only reliably by finding value discrepancies in a stock
I wrote my master thesis on stock option pricing, and then went on to do a PhD in applied math, using the same equations and ideas but this time applied to complex biological systems. Thank you for the brilliant introduction to my favorite topic!
If Derek reads the comments, I think reaction-diffusion and the math behind pattern formation would make for an awesome video. It's super visual, comes from a crazy confluence of ideas in math and chemistry, and tells an important chapter in the life of the great Alan Turing. :)
In the early 2000's I worked on "Real Options Analysis" where we were trying to apply the BSM equation to the evaluation of real assets such as oil and gas prospects. As I was reading and studying the BSM theory I came across some interesting anecdotes about how the BSM differential equation was solved. Apparently they were having trouble finding solutions to the PDE. Apparently Fischer Black, who had a PhD in physics, recognized the equation as a parabolic, diffusion equation much like Schrodinger's equation. With a change of variables he was able to write down the solutions in closed form.
Part qualified actuary here. This video took me back to Exam IFM (discontinued now), which was quite detailed and fun. We got to study more about this equation and a lot of types of options, derivatives, etc.
I love that his answer about whether this helps or not is basically "when things are good it's fine, but when things go bad it makes things much worse". Which...yeah.
And the biggest question is: what makes things go bad?? And the answer, as it was in the 2008 subprime crisis, is always: the ultra-financialization of markets, paradigmatically showed in the derivatives market
It's not 'avoiding' risk. Someone has to take the risk. And that's the rest of us. Just another way the managerial classes avoid the consequences of their mis-management of the real economy. Not to mention the cumulative transaction costs of high frequency trading. And it makes things worse for the rest of us. None of them miss meals. The equation tells them how not to. So the techno nerds want to eat their economy. How smart.
as someone who has taken soft interest in this stuff, but never taken any business classes, or messed with actual trading... you filled in so many gaps of knowledge for me with this one. thankyou veritasium!
I've traded passively for 16 years. I did it heavily at first when I sold a business I started, thinking maybe I could use some of that sale value to make more. I lost a huge chuck of it and traded lots smaller with disposable income only from then on. Each year I net about 5-8% growth because I learned something that this video touches on with the 'Radiation of Probabilities'. People often look for big fast wins, but the reality is you're looking for medium slow wins. An example is CRISPR. I watched China and Europe gain interest in genetic research, and the USA laxing their stance about genetic engineering with fetuses and crops. I bought in late 2018 around $51, and sold it when it spiked in 2020 at $160-ish. This was a huge win. One of my biggest. Sorry for the long reply, but you had a soft interest in this, and I think my anecdote is worth noting for you. As long as you never invest more than you can afford, are confident enough that your prediction is sound, and are willing to lose the whole balance, trading can be real fun. If you go all in, you will not sleep.
all of this is not applicable in real markets. you go bankrupt very quickly if you try. Black-Scholes is like a war plan - it never survives contact with the enemy. LTCM was the first jab at it. and it went great, didnt it? :)
I lost my dad about six months ago and I'm going to receive some money soon. Would it be wise to grow my money in stocks for a few years while I'm in college and then invest in rental properties afterwards, or should I start with real estate investing first?
Seeking the counsel of an experienced financial professional is wise. It may seem expensive, but as the old saying goes - "you get what you pay for" "Expert solutions require Expert providers"
Agreed, investing with the help of an advisor set me up for life. Retired with about $1.6m in stock portfolio only. I worked hard everyday as a teacher for 28 years, and my salary was over 100k annually. Supplementing my income with stocks and alternative investments helped me by far beat the retirement age of 65.
I've worked in real estate for over 25 years and have neglected a major stock portfolio. This served me well when I was flipping and renting houses, however I need a different plan now.. mind if I look up the professional guiding you please?
I'm continuously blown away more with every video by the production value and quality veritasium has reached. It is insane to think that this is youtube now... i mean, writing, editing, animations, plot/subplot, interviews, the "red line" through the whole video... yep... blown away
You're overdoing it. In terms of making the actual _understanding_ accessible to the average person, this exposition was a flop. I don't want to be "blown away", unless the aesthetic is the point, and the journey is more important than the destination.
@@-danRWhy not? I didn't know what options were before this video (even though I've seen the big short and margin call, heh) and now I'm sure I have a somewhat decent idea of what they are.
A young economist and an old economist are walking down the street, and the young economist says, "Look! A $20 bill!". The old economist says, "Nonsense. If there were a $20 bill just laying on the ground, someone would have picked it up already."
When I was a kid looking for my first car (before the internet existed) I’d circle the newspaper ad and show my Dad. He would usually say “Ring and see if it’s sold yet. If it’s a good car at a good price, someone will have already bought it.”
Yea, and market is set up through Uniform Comemercial Code so that banks actually have a claim over your "owned" stocs in a crisis. Lehman Brothers became case law. Search for "The Great Taking". Also, your stocs are used in derivative trades without you knowing.
24:33 I love how you can see the little smirk on his face when he says "those hedge funds lost a lot of money" (referring to Gamestop and Wallstreetbets)
"It's stable during good times and unstable during bad times" seems like the exact opposite of what people need. Bad times are when you need stability, when things are going well, risk is less of an issue.
My experience is more with PID loop control which can use derivative control as well ( thus the D). In general during good times, it can be used as a way to react to change and reduce problems. (trending towards zero) However if a sufficiently large change occurs, the derivative can "flip" and exacerbate the issue (trending to infinity). In such case it's important to reduce or even remove it's impact Many simple applications don't use the derivative and just stick with P (Proportional) or PI (Proportional Integral) control as it is just too tricky to properly implement.
Yeah, but options are only one financial derivative and they are based on the value of the underlying security such as stocks, indexes, and ETFs. The performance of the stock market/economy in general will definitely have some effect on options trading, but from my understanding, the same wouldn't exactly apply the other way around (or at least not in a direct manner). There are A LOT of regulations when it comes to trading options. FINRA requires that each customer of any brokerage must be specifically approved (or disapproved) for options trading. Brokerages can require a minimum $ amount in order to apply for options trading, and brokerages often have different levels of what they allow based on risk. For example, 1) purchase of puts and calls only 2) uncovered put/call writing 3) options spread transactions (from least to most risk). There are also 5 requirements that a stock must meet before it can have options. During a recession or market stress, I would expect the sellers to price their options contracts accordingly and the buyers to be aware of the increased risk depending on the type of trade for the most part cuz every1 tryna make money. Like trading risky options on margin during a recession wouldn't be the norm. I'm not super knowledgeable on finance, so I might've made incorrect assumptions. Feel free to correct me if that's the case. A case where what you said is correct and my explanation might not apply would be the 2008 recession, but it wasn't due to options really and instead due to several factors that became a domino effect. Instead of options and speculating the price of stocks, it was real estate prices that were speculated to continue rising. The little government regulation in the mortgage-backed security market and agencies falsifying the low risk of those investments led to huge demand from investors and risky subprime mortgages increased to cover that demand. Even though some investors knew that the mortgages that backed their investment were meant to fail, as long as real estate prices kept rising, both investors and borrowers would be bailed out.
This brings me nostalgia! Back in the undergrad days, I had briefly studied the Black-Scholes equation, but didn't really focus much on it because of its complexity. Almost 4 years later, its nostalgic to see it again; and maybe, learn more about it.
CDS on Lehman Brothers debt helped cause the 2008 financial crisis. The investment bank owed $600 billion in debt. Of that, $400 billion was “covered” by credit default swaps. That debt was only worth 8.62 cents on the dollar. I wouldn’t be surprised if Credit Suisse and Archegos had a similar hatred for equations. What happens in the dark pools stays in the dark pools.
Nostalgia about 4 years ago? You must be young. Edit: well obviously 🤦♂️ you said undergrad was 4 years ago. You could be someone going back to school later in life, but it’s not as likely.
@@_..-.._..-.._ now it’s all about AI and quant engineering. The attention equation is the new Black-Scholes: Attention(Q, K, V) = softmax((QK^T)/sqrt(d_k))V Q is the query matrix, K is the key matrix, V is the value matrix, and d_k is the dimension of the keys. The softmax function normalizes the scores between 0 and 1, and the dot product measures the similarity between the query and the keys. The output is a weighted sum of the values, where the weights are determined by the attention scores.
Call-Option and all that is terrible explained by Wikipedia so cna somebody explain it to me? Especialy the motivation: wouldnt people think its fis, at least when i do all this multiple times? I mean, that guy who bought the Olives: wouldnt his succes become known and no one ever sells him anything, at least not the 'Option' again? Also, is there a Average how much an Option costs in Comparison to to the Thing's value?
@@slevinchannel7589 he took a bet. It paid off. Others can do the same, which is why there is a market for it. The higher the chances of losing the bet vs the magnitude of the risk of winning or losing, the lower the premium. Premiums are priced too.
Alright, so I’ve got $234k chilling in my emergency fund, and I’m ready to graduate from “just saving” to “making my money work for me.” This Trillion Dollar Equation video feels like the perfect hype for it, but where’s the step-by-step on becoming a financial wizard? Like, do I buy stocks, invest in crypto, or start building a tiny space station? Somebody hand me a roadmap because this brain is ready for some action-but not for any broke stories later.
$234k? Dang, you’re sitting on a golden egg, my friend! But before you dive headfirst into crypto or a startup fantasy, consider this: a good financial advisor can turn that fund into something even better without the headache of you learning every investment formula. Mine practically saved me from some serious FOMO investing. Think about it-it’s worth the consultation fee.
I hear you both-my savings are nowhere near $234k, but I do want to start investing and need someone legit to guide me. Problem is, I don’t even know where to begin looking for an advisor. Are they all basically the same, or what? Any pointers?
There are a handful of CFAs. I’ve experimented with a few over the past years, but I’ve stuck with Linda Aretha Reeves for some years now, and her performance has been consistently impressive. She’s known in her field-look her up.
Just looked up Linda Aretha Reeves, and wow, she seems like exactly what I need to turn my financial goals into reality. Thanks for the recommendation!
I remember watching Linda Aretha Reeves at a Bloomberg Finance Summit four years ago-her presentation was absolutely phenomenal. If anyone can guide you to success, it’s her!
I personally dislike trading, because it is pretty much gambling for normies while sophisticated advanced banks or corporations or few very smart people, or also stock brokers pocket the money, while the money comes from the poor normies that had some hope of making money but lost it in the gamble, or some big corp making a wrong bet! You really have to be an expert mathematician to figure out markets with an average to your benefit and yet some meteor hits earth, and you lose everything! I always say: invest in yourself. If your investment pays off in shape of great job or product or art, you win big. But even at the worst outcome, it was a training session you paid for.
the biggest problem in stock market is when government steps in to bail out people with newly printed money, which inflates the currency and causing prices to rise, effectively "taxing" everyone else in the economy to save some stock gamblers funds and banks. If it wasn't for that, I wouldn't care if traders are losing money.
You smell like exit liquidity. Please don't self-project your limited understanding of the Jekyll and Hyde system that is "The Market". Anyone can be a successful trader if they manage their capital properly, understand statistical variance, and actually do the research to understand why they're buying into whatever asset class they decide to invest in. It's easy when it's a passion.
@_Syn You forgot one thing: lots of other investors who are dumb enough to think a few stats courses, thorough research, and passion is enough to make it easy. Actually, sorry, I guess you did remember that.
As a computer science engineer I cant seem to ask if: is the Bachelier normal distribution related to binary 1s and 0s? Because in each distribution it can go only up or down, there are only 2 states. Like in binary you represent more proportionally to the number of paths taken, up or down, 0 or 1. Can anibody answer me if these are related?
Agreed. That was probably the best basic description of the options market I've ever seen outside of a book. Reality is more complicated but the bedrock upon which the system is built is very clear here. One big elephant they left out is the secondary derivatives market. A dangerous behemoth lording over society like a sword of Damocles. That's where "too big to fail" comes from and it's still happening far worse than it was in 2008. It's bigger and more failure prone than ever. The pandemic several years ago could have been that "black swan" but governments dug those pockets and went deeply into debt (to private entities btw) to prevent a catastrophic failure. The truth is that something similar will inevitably happen again. It's only a matter of time and there's only so far you can kick the can before you lose the one thing keeping the entire edifice of the system together. Faith in it. When the people lose faith in their money, especially all at once, no world war can match the untold suffering in the wake of it.
Yes, and a tug of war has to do with STRENGTH, not necessarily just the # of people on the rope. This is why a stock goes up (or down) NOT because of the NUMBER of buyers vs. sellers, as Derek said (at time mark 7:45), but the STRENGTH of the buyers vs. sellers. If the buyers want to buy more strongly than the sellers want to sell, then the stock price will go up. Because price will be renegotiated with the very next transaction.
I agree with you!! Money actually grow on trees but only on trees that was planted by you!! These tress are referred to as investments. How you diversify your investment portfolio matters
Great vid, just missing the contribution of Prof. Paul Samuelson when he visited the Univ of Paris and found out Bachelier's PhD thesis full of dust and lost inside the Library, by then....Fisher Black and Myron Scholes were struggling to find a solution to their SDE, so Samuelson helped them a lot by presenting Bachelier's approach. In addition, Itô's calculus was also used by Prof. Robert Merton to make his contribution mathematically elegant and robust.
The homework (or other ways of applying the information repetitively) is how you get the information to stick. If you just watch the video and move on it’s very unlikely you will retain the information in any detail over the longer term.
@@YourBlackLocal of course an actual financial investments course is going to be much more in depth. But some of the high level core concepts are here and I think it does provide a good overview for the lay person. MBA class, no. High level recap of a very complicated and deep subject for a "manager" to get the gist of a concept from a class, totally!
how is it possible that a tier 1 engineering degree, multiple courses on options, self reading and books could not explain me derivatives as beautifully and thoroughly as one Veritasium video. This is a genius of a video, hats off to Derek and the Veritasium team, wonderful work.
Easily one of the best videos I have ever seen. The simple brilliance in covering the topic in its entire complexity is fascinating itself. Combining it with visual represantations of the hard to grasp statistical phenomena makes it even better. Loved every minute and made me wish my Derivatives professors would have had the same passion for the topic. Bravo, coming from an MSc in Finance!
Business logic and jargon makes my head explode, and this particular exposition, after Thales of Miletus, quickly became pedagogical nightmare. I need to know the tensile strength of an option; let's start at the beginning and work our way forward.
Unless I missed it, they didn't mention LTCM (Long Term Capital Management). It was a multi-billion dollar investment firm founded in 1994 by two Nobel laureates using the Black-Scholles model -- and it went bankrupt in 1998.
yea because markets are also psychological driven and behave irrational at times. So it just doesnt work long time. I recommend the book "when genius failed" on the LTCM story.
Exactly, human is too chaotic, compared to particles movement, more like a random jump instead of random walk. Market crash is one of the proof that modern portofolio theory is deadly wrong for an extreme event.
you should check out SMCI stock, not as crazy as GME as it wasn't a short squeeze, but price still went up 3x in just 1 month recently mostly due to the influence of NVDA stock.
Around the 10:00 mark, that peg board is when I realized that I wasn’t subscribed and should have totally be 10 videos ago. What an episode, truly mind blown… love me some distribution functions and probabilities.
I'm not sure most people would get your Shoulders of Giants joke, but maybe you have a good percentage of physicists and engineers. This is one of my all time favorite physicist quotes, you know it's good when Einstein is requoting it. One of my other favorites quotes is Pauli's "We are all agreed that your theory is crazy. The question which divides us is whether it is crazy enough to have a chance of being correct."I love your channel; keep the high quality videos coming.
Believing the efficient market hypothesis is like when a physics question that asks you to ignore friction. There are a number of assumptions that are obviously not true, but still lead basic economy theory to make important predictions. Just as you cannot know the coefficient of friction without physically testing the specific material, there are a lot of things you cannot know about a market without deep research into the specific traders, insider trading, or some really advanced models combined with a lot of data on the market.
A lot of appreciation to the experimentalists who are willing to go down to the field and take measurements. Like in Poor Economics for example. They are the real heroes!
As a BSc graduate in Quant Finance 10 years ago, I clicked into this video milliseconds after the silhouette of the shape of this equation entered this corner of my eye. We used to derive (or recite the derivation of) this whole equation in the final exam. Great video and interview.
I thought I'd never want to see another partial derivative again after several physics graduate couldn't explain it but you know what, I'll give them another chance
Trillion dollar industries which make and break billionaires... all devoted to shuffling around money from one place to another. Economics are crazy. As an engineer, I find the idea of entire industries bearing no tangible, material result very interesting.
Its one of the first ones where he isnt lying almost constantly in order to make the video be what they want it to be. Its also one of the few that isnt super slow content vs time. If you speed up other videos you will have a much easier time tracking then this one. Though this video is mostly non-veratasium content... the same as most videos now. Most of the video is animations, experts, clips from other videos, and other things that arnt actually veratasium's competence. Instead just existing as a middleman for competent people.
The South Sea Bubble (the Newton stocks mentioned near the beginning of the video) is a really interesting story itself. The channel Extra History has a great series on it.
Yeah, it's too bad that they didn't mention that the entire company was essentially the largest Ponzi scheme ever. And it never actually traded, or had rights to trade in the south seas at the time.
There should be an award for masterpieces on youtube and it should be called "veritassium award", becausa you dont deserve this award, you are this award. Best teaching channel on the planet
This is such a beautifully intricate breakdown of the Black Scholes model and Derivative pricing. I have an exam in a few weeks that includes 6 chapters on the mathematics and economics of derivatives so thank you for this video. Talk about right on time!
This is just masterful in its simplicity and efficiency of explanation. I'm definitely saving this link. I learned from it and I'll be sharing it with others.
Now I truly have a better understanding on calls and options. This was explained so beautifully from both you and Professor Lo where there was both the technical side but still kept it easy to digest such a complex topic. Kudos again to you and the team. What a hella fascinating topic
Run to Jesus! Trust in Him alone! I know that my trust is in the risen Saviour, Jesus Christ. I hope yours will be too! + If you have defected from God then read these Scriptures: (Lost Sheep, Luke 15:1-7 - Lost Coin, 15:8-10 - Lost Son, 15:11-32 - Rich Man and Lazarus, 16:19-31) Jesus is calling you back home, read His word, believe and repent. Saved by grace alone, through faith alone, in Christ alone! + The world is racing toward "AMAGEDDON" !!! And people need to get right with the Lord! If you have not read the books of (Daniel chapters 7-12), (Ezekiel chapters 37-39) (Matthew chapters 24:1-51 + 25:1-30), (1 Thessalonians chapters 1-5), (2 Thessalonians chapters1-3) and (Revelation chapters 6-19), now would be a good time. They will explain a lot about what is going on right now! These books will cover the "Wars" about to come, the catching up / the blessed hope, World judgement, hence the Tribulation and the Great Tribulation! These books will also be the most ominous and scary for the unbelievers and the most exciting and uplifting for those who believe in Jesus Christ as Lord and Savior!... It is my hope and prayer that people would repent and believe on the Lord Jesus Christ before all these things take place, because it is going to be very, very scary if you do not and you decide to wait and see what happens. + May the Lord encourage you to seek the truth, in Jesus' name. Amen!
Wow, congratulations on your impressive investment success! Your discipline and focus on delayed gratification is truly inspiring. I'm curious, what are some of the key factors that you consider when making investment decisions? Do you have any tips for those of us who are just starting to dip our toes into the world of investing? Thanks for sharing your story!
Everyone should watch this. I’ve often said everything comes from physics and this shows how heat diffusion and Brownian motion allows a trillion dollar options market. This is the best explanation of options I have seen! Hands down, the best.
@@Narokkurai Haha, I always decide myself what to do. Physical movement is an illusion, e.g. Parmenides also understood the fact. And illusion, of course, is a mental position. btw, In connectivity to "life": the true self is eternal.
@@rajarsi6438 Nothing is eternal, and that's a good thing. Existence without change is stagnation. The only thing that gives life meaning is the knowledge that it will some day end.
@@Narokkurai Clearly, given your comical claims, you're short on criticial thinking capacity. When you see something, in the observable reality, which is not eternal, you don't understand the principles of "space" & "time" properly.
Inspired by this, I went on to study this topic in MIT's online course 18.S096. Turns out the math background is intense and it must have been really hard to fully explain it 3b1b style. Along the way I realized quant math is so similar to what I learn in a ml ai cursus, pretty cool!
A truly efficient market = random is a scary concept. Stock price is supposed to be a dependent variable based on company performance. The time horizon for performance keeps getting pushed further into the future. For it to be totally random, all other future variables would need to be static…so weird. Thanks for the brain food. Great article!
Finally! Thank you for educating people about stochastic calculus. I feel seen :) Btw. stochastic calculus is nowadays used for more many things non-financial (natural sciences including climate modelling, machine learning, etc.) As a side remark: a process satisfying the equation at 21:05 (the price of a risky asset) is called geometric Brownian motion.
In a lot of the types of real world applications you mention, stochastic calculus is considered a necessary part of statistical mechanics. A good way to think of it is that motion, such as zones in weather moving over regions, are breaks in equalibrium. We expect randomness, but self enforced behaviours cascade into some amount of predictability.
Please please please please do more financial videos like this!!!!! I don’t even care what the topic is, just do more breakdowns like this! Love it! Great job!!! ️
As a student in this business, who has passed through a bunch of professors, I can say with confidence! With this trader, you will both learn and earn and, importantly, receive advice. Everything is competent and clear, without a bunch of any unnecessary movements! Keep up the good work!
Need Part-2: these ideas (Gaussian assumption, random walk, derivatives, credit default swaps, mortgage backed securities) directly led to the greatest financial catastrophe ever recorded, the 2007-2008 Crash. For a less « naive » view, see Mandelbrot: both nature and financial markets are better described/modeled by mathematical « roughness »: fractals, non-Gaussian distributions, with fat tails where the likelihood of large disruptive events (avalanche) is much greater than what the random-walk, Gaussian distribution assumes
Absolutely mind-blowing how the concepts of randomness and probability can have such massive financial implications. The development and application of these mathematical models, and their role in shaping modern finance is a clear testament to the power of mathematics and science in deciphering patterns amidst chaos. It's remarkable how these game-changing theories extended their reach beyond academia all the way to Wall Street, instigating the rise of multi-trillion dollar industries.
Check out the book "When Genius Failed" by Roger Lowenstein. It explains Black-Scholes, what happened when the laureates built a company using the equation (and had to be bailed out by the Federal Reserve). Surprised Derek didn't cover this.
In my opinion, 'Veritasium' is one of the best RUclips channels out there on so many levels. The amount of thought and detail poured into each video is genuinely remarkable. The content is informative, engaging, and relatively easy to follow and understand. I’d love to hear what others think!
The perfect combination of educational and entertaining. Thanks for the high quality stuff! Given reduced inflation signals and as the Federal Reserve has halted rate hikes, what are the best additions for a $120K portfolio to enhance the overall performance of my portfolio this year
This is why having the right plan is invaluable, my $510k portfolio is well-matched for every season of the market and recently hit 100% rise fromm early last year. I and my CFP are working on a more figures ballpark goal this 2024
Lol, so you just overlooked professor Andrew Lo's aping mannerisms, which he had to acquire to establish his credibility in the "free world". Every twitch of his head is broadcasting loud and clear that he's no serious thinker
Well that should be easy when you are simply mimicking what Physicists, mathematicians etc. have spent the last 200 years deciphering... Also their goal was not to explain it verbally but mathematically, while he is simply explaining what they did.
Of course there is more to options but you made a very clear example of the basics, especially dynamic or Delta Hedging. Best illustration of delta Hedging i have seen anywhere. This is an important component of what makes the underlying price to move, as dealers have to remain risk neutral by buying and selling the underlying.
Id recommend listening to Jerry Parker, or toptradersunplugged with Moritz Seibert and Niels Kastrup-Larsen. they are quants with decades of experience. the podcast is very in depth, but excellent!
Slight correction @ 19:57 Yes, Bob Merton did publish a monograph illustrating the Black-Scholes "Differential" Equation. However, it was NOT his own version and it was NOT discovered independently by Bob. He worked very closely with both Myron and Fisher who already had a "Model" of how to price a European call option. However, the main issue was they were both struggling with finding the terminal value of an option. Story time... In the early 1970s, Myron's masters students initially used the CAPM model to discount the terminal value of an option to try find its true present value, but the discount rate kept on changing. Side note, yes, Black-Scholes is just simply a DCF model (Discounted Cash Flow). Myron later realized thru his discussions with Fisher to use the risk-free rate to discount the terminal value of an option to find its true value. So really, you can say Fisher was kind of the mastermind behind the Black-Scholes "Model". I say Model because this was prior to Bob Merton's work on the "Differential" Equation which you are talking about in your video. The Black-Scholes Model and the Differential Equation are one and the same with the only difference that the Model is represented with the stock price, strike price, volatility, date of expiration, and the risk-free rate as fixed variables. The Differential Equation is represented thru abstract mathematical symbols to reflect the changes in those same variables like the change in the option price relative to the change in stock price as well as the change in time, and the change in the change of the stock price relative to the option price, "etc., etc.". I say "etc." because this can go on forever i.e. measuring the changes of the change of change between the stock price, time, volatility which in the real world of trading we call...delta, gamma, vega, theta, vomma, charm, rho, vanna, speed, veta, zomma, color, etc. The output of these mathematical symbols with silly names actually do spit out real numbers which do have real value particularly to option market makers that use them every day. Note, your options portfolio has to be in the hundreds of millions of dollars for you to really care about those numbers but I digress. Back to the story...Fisher and Myron realized that in order to price an option you actually have to think about creating a real life portfolio and pricing the option based on that portfolio (which we call a zero-beta portfolio). The alternative is using mathematics alone to price the value of an option which many people foolishly try to do even today. The real life portfolio was a hedge which eliminated systematic risk (market risk). However, the hedge was not a zero-value hedge, you have to put up money to establish it - like in real life - and the return on that hedge has to be the risk-free rate of return which is the closed-form solution i.e. a real fixed number. It was actually Fisher thru his discussions with Jack Treynor who initially came up with the concept of a differential equation to explain the dynamics i.e. the changes between the real life portfolio (stock price against the call option), the value of the option, and the other variables I previously mentioned. But since, an option has a term life to it - the boundary condition is discontinuous, and it is extremely difficult to integrate or find a closed-form solution to a discontinuous boundary condition; unless, the solution is like an average or a constantly moving number like the numbers found by Myron's masters students initially using the CAPM to discount the terminal value of an option. In that case, the solution is not a closed-form or analytical solution but what we call a numerical or classical solution. Nevertheless, it was only after Myron read some old papers by James Boness which had an expected terminal value of an option that Myron told Fisher, "why don't we try putting in the riskless rate, because its already in our differential equation, differentiate that which is the closed form solution and then let's see what we get." So, they differentiated it and put in the differential equation and voila! It solved it! So that's when they realized for the first time what the implications of the risk-free rate was which essentially assumed the underlying asset had to have an expected return equal to the risk-free rate so that they could discount it using the risk-free rate. So, Myron and Fisher were able to take Boness' equations, differentiate it - using the risk-free rate - and get back the original differential equation they already had which made them realize they had the solution. It was only later that Bob Merton wrote out the differential equation in its entirety using technology like ito calculus which arbitrarily represents the randomness in stock prices to satisfy the stochastic definition of Brownian motion using real life numbers e.g. dividing by 2 and squaring the result. The result in this case is volatility or what we call implied volatility because it is the only unknown variable in the Model which is solved algebraically using - BELIEVE IT OR NOT - the real life price of the option! I think it was Riccardo Rebonato who famously said, "implied volatility is the wrong number to put in the wrong formula to get the right price." Also, Bob used the lognormal distribution function to explain the possible outcomes of the stock price relative to the strike price during the life of the option because lognormal functions cannot input negative values in its argument. In other words, stock prices can't go negative. Who knew...lol! Normal distributions are usually used to describe stock returns which can go negative. Just ask Kathy Woods lol! Finally, the drift you are referring to in the video is represented as the risk-free rate which is the closed-form solution to the differential equation. Bob quintessentially represented it with undying mathematical precision as the letter "r" in both the model and the differential equation.
It’s hilarious, I just started watching Finance Theory I videos recorded in 2008 (and posted 10 years ago), on RUclips probably a week ago… The teacher? Dr. Andrew Lo! 😂
These are by far my favourite round of videos. When you go deep into the history of math. It teaches me so much and is truly fascinating. My other favourite was the one on imaginary numbers
Veritasium never fails to amaze me! Clarity in explaining the concept for layman terms. My inspiration to learn financial engineering. History and context matters equally relative to the invention itself.
26:06 - if during normal times it makes market more stable, and during turbulent times, it exacerbates the market "dislocations" - if you ask me - he just described it as in general it makes market less stable, not "all three" ("more stable, less stable and no change")
Exactly. Math might have led to predictions, but it was a discovery as destructive as the atomic bomb. Now the market and the world economies are in interconnected house of cards. If one falls(which through these equations and their applications, can be made to happen by a singular entity), it takes down everything. And people think its great, but its building a world on a house of cards, a foundation of sand. Its a terrible terrible idea and its going to end in global disaster
@@johnmorgan233 It's not the point I'm trying to make, the question wasn't about differential equations. The question was about "options" and other "derivative" - as I understand it - financial market assets. For me, it just seemed like he repeated the consensus on this matter which is kind of "it depends", while - after he's following explanation - one could argue, that the overall outcome of those assets is negative (more stability in stable times + more turbulence in turbulent times vs "normal" stability in stable times + "normal" level turbulence in turbulent times). The issue is of course probably more complex than this simple explanation, but the way he put it into words made me seriously wonder if the "consensus" isn't a nice tale people in financing like to tell themselves to feel better:P (let's face it. everyone has probably a similar tale like this on some subject, like for example, we use products like iPhones with ethically questionable manufacturing). But yeah that made me wonder if the real pros of those derivatives and the consensus on the matter isn't a stretch by chance. (if it would be, it would be definitely worth doing something about it). I'll take base-level stable times + base-level turbulent times over super-stable time + super-turbulent times any day of the week
This video brought tears to my eyes. I've recently been struggling to understand the science of finance and economy and stock prices and all that, and to see it, or at least an important part of it, explained in such fundamental terms, compared to the spread of heat, is truly amazing and awe-inspiring. From the bottom of my science-loving heart, thank you for all that you do❤
"I can calculate the motions of heavenly bodies, but not the madness of people" this gotta be one of the hardest quotes.
Specifically because "motion" actually occurs in ones own material mind only.
And apparently referencing his investment in slavers... Madness of people indeed.
@@AqdasShaikh-l2p He's trying to get hate. Don't pay attention to him.
I can understand Veritasium Videos about the motions of heavenly bodies, but not the madness of people and how to calcualte it with math
@@jamesdunbar2386I commented the same and read this lol
When a physics channel explains F&O better than any finance channel 🙏🏻
if a finance channel would explain what they do to normal people, they couldnt profit of them anymore.
the madness of people@@zwojack7285
@zwojack7285 😂 stupid people be stupiding
@@zwojack7285Bingo. One man's profit is another one's loss. Exploitation is how they make money.
@@zwojack7285Sorry, just want to be sure I'm understanding - you think RUclips finance channels are run by the ultra-wealthy movers and shakers?
After all this time, it finally took a science channel to teach me what options actually are and how they work.
And now you are finally confident enough to lose all your life savings!
@@pauls3075In my case it has done the opposite lol
I already didn't want to risk any money in trading or speculation. This confirms that it was the right gut feeling.
yeah but then he tried to sell you a 2000$ air mattress with a thermostat in it.
@@acmhfmggru that is rather non-sensical. You can go as hardcore in mathematics in finance as you like, given that you are trying to model something that can't really be modelled, as long as it makes financial sense. You can't linger on for too long on things that don't work. Also, the video said nothing much about options pricing other than what you read in a financial mathematics book in the first 2-3 pages. Try pricing options with more exotic pay-offs or synthetic products... this is where it gets hot. Also a background in stochastic calculus, probabilities and statistics and measure theory is needed and that takes a good 2-3 years to get to in a maths undergraduate degree.
Veritasium inspires me.. My parents said if i get 70K followers They'd buy me a professional camera for recording..begging u guys , literally
Begging..
Unfortunately, Prof. Jim Simons passed away today (May 10, 2024). As a graduate student in math department of Stony Brook University, I came to know this earlier. He's genius of a person. Rest in peace, rest in knowledge. I always wanted to meet him but the nature has other plans. Om Shanti.
He’s the reason I started my own quant firm. Passed hours before my 22nd birthday. Knew many fraternity brothers of mine at SBU. Always heard great things about him. RIP sir
rip😔
Rip 💐
Rest in peace
Rip
You are better at explaining financial economics than most econ/finance channel on youtube
That just shows you how smart this guy is. He can explain things in the most basic way. Pictures can surely help a lot.
❤❤❤❤ I like his content
Because most finance/econ channels are literal scammers and are not trying to educate anyone. The more money there is to be made in a field, the more awful people it attracts, which is why the finance and health niches are by far the worst on RUclips
Yeah... really good one!
This 👆
I love the animations.
Bien
It's so fascinating to see the dots being connected from finance to math to a physics breakthrough, science is beautiful
✨ its art
Beauty is subjective.
Maths is not.
Unfortunately, elegant maths is used for some horrific things.
Science is a method or language to read and understand the easter eggs and messages our creator prepared for the modernists and "people of knowledge," so that they may understand, that there is no doubt about the truthfulness and the divinity of His final revelation - the qur'an.
@@k.r.99 Just no.
You don't get to attach your invisible friend to the objective reality of maths, with some word salad.
@@Rugopoly Jesse from breaking bad 😂
My portfolio for the past 30 years has always been self managed and I own 3 shares of Berkshire Hathaway Class A stock (BRK:A) which I bought in at about $17,000 during the mid 90s, I'm currently liquidating some of these positions to incoporate new Gen. Stocks, but am I better off re-investing into Gold as it seems stocks are a little too unstable right now
`I'm new to cryptocurrency and don't understand how it really works. how Can someone know the right approach to investing and making good profits from cryptocurrency investments?
As a beginner investor, it’s essential for you to have a mentor to keep you accountable. Myself, I’m guided by Ryan Donald.. A widely known crypto consultant
I've come across this name before, is he really reliable?
Yeah!, Ryan was my hope during the 'bear summer' last year. I did so many mistakes but also learned so much from it, and of course from Ryan Donald. He is my number one source when it comes to crypto and TA.
It's amazing that you got to know Ryan , I started my trade with $15,000, a week later, we had grown to $55,000. This man is absolutely a genius.
Wow! As somebody who used to work with derivatives in my job I can say this is hands down the best, most accessible explanation of the Black Scholes equation that I've ever seen. This channel makes teaching look easy.
And i barely understood any of it, lol
But the social and societal elements were fascinating.
Exactly what I meant by my other comment! Videos like these are modern tools that distill very complex topics into something far more easy to absorb, assuming a certain level of prerequisite knowledge of course. It's something we wish we had when we were going thru uni learning all this stuff through 300 page thick text books and just a tonne of b&w charts that are somehow meant to be relevant to an 19yrold back in the day... and these days it's just available and FREE*! .... (* subject to sitting thru a few ads and message from our sponsors lol)
Have you used the Black Scholes equation to invest?
The industry does not use the Black Scholes nowadays.. I really thought he would talk about the problem of fat tails, that is assuming normality in the distribution for the change in the stock price, events like 2008 are almost impossible but indeed should be not more than improbable.
Also, and I do not know if he noted it in the video but BSM is not stochastic, it is deterministic.
@@EliudSibuor I haven’t. I’m a mathematician at heart, but I never had the stomach for active investing. I spend my time learning skills that will earn me a good salary, and I put money in an index fund.
The style of this video is brilliant. It reminds me of a film where there are multiple plot lines and these seemingly unrelated subplots satisfyingly come together at the end.
Derek is the spiritual heir to James Burke
Which movie?
Which movie?
Cloud Atlas?
Which movie are you talking about?? Sounds interesting
I don't think that there is any other channel that brings such kind of interesting technical content in such lucid terms.
And for free
There are plenty you just don't understand anything that's even an inch above the layman's terms. Videos like this just exacerbate the problem by making people think they learned something when in reality it oversimplified so much stuff that it's borderline wrong.
@@shivanshu6204you definitely think you're smarter than you actually are
@@towfik2947 r/iamverysmart
@@shivanshu6204 How do you come to knowledge of this kind of information in the first place? You learn the basics, in oversimplified terms, and graduate to more advanced understandings of concepts. Going to university and getting formal education is one way to do this. However, that’s inaccessible for people who might be past that stage in life or are focused on another major but have interests in this subject. And there certainly are other channels that bring to light information from these subjects, but in much too complicated terms for a beginner to understand, which hurts the field’s credibility in the public’s eyes in being understandable. However, this channel has been able to bring the basic concepts of these subjects in simple and understandable terms, something everyone can gain value from. Yes, whilst some who are inexperienced might make false conclusions from this info, in general, the video is accomplishing its goal of bringing this information to the public in understandable but accurate description. It is certainly accurate and well researched, and if there have been errors or misconceptions in a video of this channel, other channels and the educated public in the field have brought to light such errors (like in his video on electricity). The purpose is not to give people to most precise information, but it is to spark a curiosity in finding more precise information, and this information is not oversimplified at all, it is simply not all the information and explanation, which is what the person themselves must find on their own.
The conclusion here is “yes”: you do think you are smarter than you actually are, this conclusion being derived from the fact that you fail to understand the purpose of this channel and its videos.
it's kinda crazy how nobody's talking about the forbidden ebook called The Mystic Labyrinth on Vexoner
Not even 5 minutes in but this is easily the best explanation of stock options I've ever seen
Cap 🧢
Also the first proper explanation of the gamestop issue I've seen.
This channel deserves some sort of a an award or recognition on RUclips for being so informative and engaging. The amount of detail is astounding. RUclips should start rewarding this level of professionalism and dedication.
Agreed
ur smart brain!!! :D /s
He deserves a nobel price
He does indeed get paid money.
Relax dude, this isnt some revolutionary way of teaching/giving out information. You probably havent had good education prior to this so this is your peak moment.
As a pure math undergrad turned math teacher turned stats masters turned actuary... just wow. I had a smile across my face throughout as you connected the dots across the history of this topic. Fantastic as usual
Yo, I have a very similar back story and am super interested in actuarial science. Would you be opposed to virtual communication about your development into an actuary?
said they, will, would: disliked; also options are insurance which means they ouht be outlawed for unjust enrichment.
I'm going to do whatever courses you have done and I am excited for it.
As a kid who failed math two times before graduating, it's still very interesting
I am interested in knowing your background and how u ended up in actuary 🙏
I have a finance degree, and this 30 min video explained this all far better than any class I've ever taken. Bravo to you for succinctly explaining an incredibly difficult concept to grasp in such a short format.
Also, those comments by Professor Lo towards the end are eerily similar to that dinner scene in The Big Short with that synthetic derivatives manager. Gave me the chills. Only this time, instead of derivatives on the residential mortgage market, it's the commercial mortgage market as well as municipal bond market. Both of those are in tremendous upheaval and market distress and will be for the next few years. Any derivatives riding on those underlying financial instruments are toast.
The funny way he responded in terms of the size of the market and it provides stability when things are going well and then didn't address what happens when things go badly, suggests the downside risk is being ignored or is not understood. What will happen when there is the enevitable downturn?
In case Derek or anyone on his team reads this, $100 in the medallion fund does not compound yearly at 66%. It yields 66% per year. The size of the medallion fund is limited by the size of the options market. If the fund grows too large, their edge experiences diminishing returns. By this fundamental limitation of their strategy, the fund only scales with the efficacy of their edge and the rest is liquidated for employees and original shareholders. If it was truly compoundable, then the fund wouldn't be closed and an efficient market would infinitely allocate to it until itintroduced price distortions that arbitrage the edge. The initial statement about $100 becoming billions in decades is not true.
I mean, obviously... It was just a way to visualize how much a 66% return yearly is compared to the usual ~8% or whatever it is
I gather it's not literally true in terms of the expected gain, but remains generally true that earnings will be high?
@@Luminaria999 Obviously? I would have never thought that
Actually Medallion doesn’t trade options, so their capacity is limited by the number of transactions they’re able to perform daily (millions).
@@Luminaria999 He literally just explained how the money doesn't compound like that. While, the 8% (10%) you are talking about does describe a compounding effect. There is no comparison to make between the two because they don't mean the same thing.
I've never fully grasped how options worked until now, I swear other people go out of their way to make it appear more complicated than it really is.
They do, because they teach you to use them badly so they can exploit when you mess up.
They make it complicated in order to obfuscate truth - you sell and buy things you do not own. Imagine you selling car that is not yours. You would land in jail. But rich and powerful, belonging to certain ethnic group, get bailed out if they screw things up.
too much@@Elemblue2
that's because generally the people that try to teach it, don't grasp it themselves, they just regurgitate.
Its gambling
Veritaseum videos are like a Nolan movie. It goes through multiple different story lines, and finally converges into one thing that finally lets you make sense of the whole story.
Underrated comment
Sounds like VSauce. :)
Sales.
No. Stop, it cringe.
Derek,
I am so impressed with the quality of teaching and communication of this video. You have every right to be very proud. I’m 64, consume huge amounts of information daily and am rarely impressively struck by the lucidity and insights and especially with the order they are presented. It’s as if you could read my mind. Each time as I began wondering something, you presented that exact thing - as a question or factoid.
Friggin’ marvelous.
❤👍👍
Make sure to contribute to the channel, it really educates the society.
Worked in the OTC derivatives industry for years, and did many training classes. A great video. As an interesting personal note, I once worked with a quant group who had Fisher Black's old office, which had been turned into a "fish bowl" type group work space. It was a great partner's corner office, but no one would take it, hence being turned into a team office. He had only died recently, and no one would take it, as it would have been viewed as pretentious. Such was the esteem he was held in.
lol nobody cares about fisher black, imagine wasting economic space because money hungry people viewed a man like a god.
I would take it, who cares. Offices are for the living. There are graveyards for that.
@@crimpers5543 My point precisely.
@@crimpers5543humans often do things out of respect for those that have exited their field after leaving a lasting impression. We retire jerseys and player numbers on professional teams for great athletes. We make memorial benches at the local golf course that nobody will realistically use and plant trees with a placard to honor those who were important to local parks or communities. A girl in my high school passed away suddenly, and her assigned parking space at the school remained untouched and reserved for her for the rest of the year, even though all parking passes were sold out and there was a decent backlog of those wanting one.
It may technically be beneficial to be devoid of human sentiment, but it doesn’t make you cool and being cold about this kind of thing certainly isn’t something to brag about.
Fantastic
Heads up: when we use the terms "American vs European" options we do not mean that only in America are there options that you can exercise whenever. Most options can be exercised before the set date (=American), even in Europe. Over-the-counter options I believe are more often European option. The terms come from the origin of where these options were initially prevalent but both styles can be found around the world.
"what is the wind speed of an air laden swallow?"
Draw the damn owl@@Knightfall21
@Knightfall21 European or African?
1:00 Just heard about Jim Simons' passing today (10th May 2024). I recalled watching his contribution to hedge funding from this channel about two months ago. I came here to appreciate his contribution once more. RIP Legend!
Not so rich after all
As a mathematician, this was the best video I have seen for months! Thanks for the great work!
I don't think this beats the previous episode about LEDs. I'm a little biased, though (pun unintended).
what do you normally watch as a mathematician?
@@Krishna-pt3yu cat videos
@@Krishna-pt3yu normal is a distribution.
Yea, and add this with the fact that the market through Uniform Comemercial Code is set us so banks actually have a claim over your "owned" stocs in a crisis. Lehman Brothers became case law. Search for "The Great Taking".
Pop sci often gets the heat for not really being serious math/science. Good to see Derek not shying away from showing more equations and instead making a whole video on one.
A
The issue is that the math may be a smoke screen for evading taxes. Given the secretive nature of these funds no one really knows the inner details. It's a little problematic that Derek is presenting only one explanation.
What
Thats how I feel about Kurzgesagt videos. They are like, _your immune system is an army of tiny warriors who missed lunch._ Bro what? Just tell me what a T-cell is.
@@asclepeos wooow that really a good point...
One lesson I've learned from millionaires is to always put your money to work, no matter how small. Even investing €200 per month can compound to tremendous wealth over decades. The key is to keep going!
My advice for who wants to grow financially this year, invest. Saving is good, but investing elevates your finances. Thanks to my financial advisor, my portfolio is thriving, and l'm proud of last year's decisions.
People often don't realize how important financial advisors are. Data from the last 50 years shows that people who work with CFAs usually earn more than those who don't. I've worked with a Adviser for 7 years, and now I have a $2 million portfolio.
I've stuck with ''Julianne Iwersen Niemann" for some years now, and her performance has been consistently impressive. She's quite known in her field, look her up.
Cool. Bots talking to each other.
@@bofh Shills, bots and snares for the ignorant....disgusting, isn't it?
you have such a gift to explain these things. Your video on Fourier transformation helped me immensely in my PhD dissertation actually (i still had to find "legit" sources cause a veritasium video doesn't count, but I understood it better from you than from any "proper" papers). Please never stop making these, you explain complicated things so well
May I ask which topic and field your PhD research was about?
@@element4element4 Microplastics in industrial wastewaters. I'm an environmental chemist. We used Fourier transform infrared spectroscopy to detect microplastics.
@@blazejecar That's interesting.
Dude, I know it has been 2 months already and maybe you are not even German speaking. But if you are I highly recommend the mathematics text books by Lothar Papula called "Mathematik für Ingenieure". He helped me understand most mathematic principles and I am very bad at physics and mathematics. Brilliant books and they even have exercise books. I was actually able to do a Fourier transformation on my own at the end of the semester.
It's worth mentioning that Merton and Scholes, who were champions of the efficient market hypothesis, were part of the board of directors of a hedge fund called Long-Term Capital, which ironically sought to exploit market inefficiencies to make money. The fund ended up collapsing less than 4 years later and receiving a huge bailout.
In the years before, Ed Thorp's fund was making record profits until it was dismantled by the US gov.
Source: Fortune's Formula, very interesting read
came here to say this- LTCM[sic] is my go-to example of the difference between theory and practice.. also, didnt buffett make a giant bet explicitly against black-scholes? a huge long term short put position on the s&p? feel like if he had taken a bath on that it would have made the news.
@@theupsonThe thing about buffet is that he evaluated sticks in a value perspective (what is it worth) which means with a lot of work he will be right and can take positions on a few stocks, whereas black-sholes will be right most of the time for every single stock. So you can beat black-sholes but only reliably by finding value discrepancies in a stock
@@noahbarnett3121 Usually these actors have full Buffet style insider trading options students of commerce dont.
@@theupson Buffett won LTCM lost.
@@noahbarnett3121what is sticks? Where did you learn stock terms? I need to know them.
I wrote my master thesis on stock option pricing, and then went on to do a PhD in applied math, using the same equations and ideas but this time applied to complex biological systems. Thank you for the brilliant introduction to my favorite topic!
I would be curious to read your biology paper.
@@Ryan256me as well!
That sounds amazing!
please share it!
If Derek reads the comments, I think reaction-diffusion and the math behind pattern formation would make for an awesome video. It's super visual, comes from a crazy confluence of ideas in math and chemistry, and tells an important chapter in the life of the great Alan Turing. :)
In the early 2000's I worked on "Real Options Analysis" where we were trying to apply the BSM equation to the evaluation of real assets such as oil and gas prospects. As I was reading and studying the BSM theory I came across some interesting anecdotes about how the BSM differential equation was solved. Apparently they were having trouble finding solutions to the PDE. Apparently Fischer Black, who had a PhD in physics, recognized the equation as a parabolic, diffusion equation much like Schrodinger's equation. With a change of variables he was able to write down the solutions in closed form.
Author here: How 'usable' and 'useful' is this for a Tiemtraveler who findsh imself in the Dark Ages?
@@slevinchannel7589 you would need to find an exact equivalent to options contracts for that time in human history. Good luck.
I’m an actuary currently preparing for an Asset&Liability modeling exam. This is way more entertaining than any of my other study material!
As a former actuary, hang in there. Light at the end of the tunnel
Best of luck!
Part qualified actuary here. This video took me back to Exam IFM (discontinued now), which was quite detailed and fun. We got to study more about this equation and a lot of types of options, derivatives, etc.
I love that his answer about whether this helps or not is basically "when things are good it's fine, but when things go bad it makes things much worse". Which...yeah.
Literally what my time series analysis professor says every class
And the biggest question is: what makes things go bad?? And the answer, as it was in the 2008 subprime crisis, is always: the ultra-financialization of markets, paradigmatically showed in the derivatives market
It's not 'avoiding' risk. Someone has to take the risk. And that's the rest of us. Just another way the managerial classes avoid the consequences of their mis-management of the real economy. Not to mention the cumulative transaction costs of high frequency trading.
And it makes things worse for the rest of us. None of them miss meals. The equation tells them how not to. So the techno nerds want to eat their economy. How smart.
AKA leverage
@@charlesstpierre9502 Thats what $GME really was - the hedge funds opened themselves up to risk and had it transferred to them
as someone who has taken soft interest in this stuff, but never taken any business classes, or messed with actual trading... you filled in so many gaps of knowledge for me with this one. thankyou veritasium!
This is statistics. You can learn more about risk analysis in graduate level statistics classes.
Actuarial science involves this sort of modeling.
lol
I've traded passively for 16 years. I did it heavily at first when I sold a business I started, thinking maybe I could use some of that sale value to make more. I lost a huge chuck of it and traded lots smaller with disposable income only from then on. Each year I net about 5-8% growth because I learned something that this video touches on with the 'Radiation of Probabilities'. People often look for big fast wins, but the reality is you're looking for medium slow wins. An example is CRISPR. I watched China and Europe gain interest in genetic research, and the USA laxing their stance about genetic engineering with fetuses and crops. I bought in late 2018 around $51, and sold it when it spiked in 2020 at $160-ish. This was a huge win. One of my biggest.
Sorry for the long reply, but you had a soft interest in this, and I think my anecdote is worth noting for you. As long as you never invest more than you can afford, are confident enough that your prediction is sound, and are willing to lose the whole balance, trading can be real fun. If you go all in, you will not sleep.
all of this is not applicable in real markets. you go bankrupt very quickly if you try. Black-Scholes is like a war plan - it never survives contact with the enemy. LTCM was the first jab at it. and it went great, didnt it? :)
Ima take my knowledge from this video and start buying NFTs
I lost my dad about six months ago and I'm going to receive some money soon. Would it be wise to grow my money in stocks for a few years while I'm in college and then invest in rental properties afterwards, or should I start with real estate investing first?
Seeking the counsel of an experienced financial professional is wise. It may seem expensive, but as the old saying goes - "you get what you pay for" "Expert solutions require Expert providers"
Agreed, investing with the help of an advisor set me up for life. Retired with about $1.6m in stock portfolio only. I worked hard everyday as a teacher for 28 years, and my salary was over 100k annually. Supplementing my income with stocks and alternative investments helped me by far beat the retirement age of 65.
I've worked in real estate for over 25 years and have neglected a major stock portfolio. This served me well when I was flipping and renting houses, however I need a different plan now.. mind if I look up the professional guiding you please?
sure you can! Judith Lynn Staufer is the advisor I work with. Just search her name, You’ll find necessary details need to set up an appointment.
Thanks for sharing. found her website instantly. After reviewing her credentials i reached out to her.
I'm continuously blown away more with every video by the production value and quality veritasium has reached. It is insane to think that this is youtube now... i mean, writing, editing, animations, plot/subplot, interviews, the "red line" through the whole video... yep... blown away
You're overdoing it.
In terms of making the actual _understanding_ accessible to the average person, this exposition was a flop. I don't want to be "blown away", unless the aesthetic is the point, and the journey is more important than the destination.
@@-danRWhy not? I didn't know what options were before this video (even though I've seen the big short and margin call, heh) and now I'm sure I have a somewhat decent idea of what they are.
A young economist and an old economist are walking down the street, and the young economist says, "Look! A $20 bill!". The old economist says, "Nonsense. If there were a $20 bill just laying on the ground, someone would have picked it up already."
I guess it only applies to spherical $20 bills in a vacuum.
The up and coming economist replies, "Nah. It's chump change."
When I was a kid looking for my first car (before the internet existed) I’d circle the newspaper ad and show my Dad. He would usually say “Ring and see if it’s sold yet. If it’s a good car at a good price, someone will have already bought it.”
@@farmergiles1065yeah nah that guy is an idiot.
this is the best comment in the comment section
I'll have to remember that one
As someone with a post-grad finance degree, gotta say, this is one of the best videos on derivatives I've seen. Great work. Love this!
Yea, and market is set up through Uniform Comemercial Code so that banks actually have a claim over your "owned" stocs in a crisis. Lehman Brothers became case law. Search for "The Great Taking". Also, your stocs are used in derivative trades without you knowing.
24:33 I love how you can see the little smirk on his face when he says "those hedge funds lost a lot of money" (referring to Gamestop and Wallstreetbets)
"It's stable during good times and unstable during bad times" seems like the exact opposite of what people need. Bad times are when you need stability, when things are going well, risk is less of an issue.
These are just both sides of the same medal.
My experience is more with PID loop control which can use derivative control as well ( thus the D).
In general during good times, it can be used as a way to react to change and reduce problems. (trending towards zero)
However if a sufficiently large change occurs, the derivative can "flip" and exacerbate the issue (trending to infinity). In such case it's important to reduce or even remove it's impact
Many simple applications don't use the derivative and just stick with P (Proportional) or PI (Proportional Integral) control as it is just too tricky to properly implement.
Yeah, but options are only one financial derivative and they are based on the value of the underlying security such as stocks, indexes, and ETFs. The performance of the stock market/economy in general will definitely have some effect on options trading, but from my understanding, the same wouldn't exactly apply the other way around (or at least not in a direct manner). There are A LOT of regulations when it comes to trading options. FINRA requires that each customer of any brokerage must be specifically approved (or disapproved) for options trading. Brokerages can require a minimum $ amount in order to apply for options trading, and brokerages often have different levels of what they allow based on risk. For example, 1) purchase of puts and calls only 2) uncovered put/call writing 3) options spread transactions (from least to most risk). There are also 5 requirements that a stock must meet before it can have options. During a recession or market stress, I would expect the sellers to price their options contracts accordingly and the buyers to be aware of the increased risk depending on the type of trade for the most part cuz every1 tryna make money. Like trading risky options on margin during a recession wouldn't be the norm. I'm not super knowledgeable on finance, so I might've made incorrect assumptions. Feel free to correct me if that's the case. A case where what you said is correct and my explanation might not apply would be the 2008 recession, but it wasn't due to options really and instead due to several factors that became a domino effect. Instead of options and speculating the price of stocks, it was real estate prices that were speculated to continue rising. The little government regulation in the mortgage-backed security market and agencies falsifying the low risk of those investments led to huge demand from investors and risky subprime mortgages increased to cover that demand. Even though some investors knew that the mortgages that backed their investment were meant to fail, as long as real estate prices kept rising, both investors and borrowers would be bailed out.
Exactly. Financial institutions build up reputation in the good times and then make us all pay for it as soon as their equations stop working.
Finance as an industry is parasitic and cancerous.
This brings me nostalgia! Back in the undergrad days, I had briefly studied the Black-Scholes equation, but didn't really focus much on it because of its complexity. Almost 4 years later, its nostalgic to see it again; and maybe, learn more about it.
CDS on Lehman Brothers debt helped cause the 2008 financial crisis. The investment bank owed $600 billion in debt. Of that, $400 billion was “covered” by credit default swaps. That debt was only worth 8.62 cents on the dollar. I wouldn’t be surprised if Credit Suisse and Archegos had a similar hatred for equations. What happens in the dark pools stays in the dark pools.
Nostalgia about 4 years ago? You must be young. Edit: well obviously 🤦♂️ you said undergrad was 4 years ago. You could be someone going back to school later in life, but it’s not as likely.
@@_..-.._..-.._ now it’s all about AI and quant engineering.
The attention equation is the new Black-Scholes:
Attention(Q, K, V) = softmax((QK^T)/sqrt(d_k))V
Q is the query matrix, K is the key matrix, V is the value matrix, and d_k is the dimension of the keys. The softmax function normalizes the scores between 0 and 1, and the dot product measures the similarity between the query and the keys. The output is a weighted sum of the values, where the weights are determined by the attention scores.
@@_..-.._..-.._right I was thinking he meant like 20 years ago lol. Bro said 4 years.
why not study it again and make more money
"What did Simons get right that Newton got wrong? For one thing Simons was able to stand on the shoulders of giants." Masterpiece.
Call-Option and all that is terrible explained by Wikipedia so cna somebody explain it to me? Especialy the motivation: wouldnt people think its fis, at least when i do all this multiple times? I mean, that guy who bought the Olives: wouldnt his succes become known and no one ever sells him anything, at least not the 'Option' again? Also, is there a
Average how much an Option costs in Comparison to to the Thing's value?
@@slevinchannel7589 he took a bet. It paid off. Others can do the same, which is why there is a market for it. The higher the chances of losing the bet vs the magnitude of the risk of winning or losing, the lower the premium. Premiums are priced too.
@slevinchannel7589 if you knew the things values it wouldn't cost anything - you'd never lose.
- value is a finite sum. Irrespective of our subjective opion. And as far as they are concerned, in markets they never matter, only numbers do.
@@oikonomikos I dont know if theres a language-barriere here but i understood Nothing about your comment just now
Alright, so I’ve got $234k chilling in my emergency fund, and I’m ready to graduate from “just saving” to “making my money work for me.” This Trillion Dollar Equation video feels like the perfect hype for it, but where’s the step-by-step on becoming a financial wizard? Like, do I buy stocks, invest in crypto, or start building a tiny space station? Somebody hand me a roadmap because this brain is ready for some action-but not for any broke stories later.
$234k? Dang, you’re sitting on a golden egg, my friend! But before you dive headfirst into crypto or a startup fantasy, consider this: a good financial advisor can turn that fund into something even better without the headache of you learning every investment formula. Mine practically saved me from some serious FOMO investing. Think about it-it’s worth the consultation fee.
I hear you both-my savings are nowhere near $234k, but I do want to start investing and need someone legit to guide me. Problem is, I don’t even know where to begin looking for an advisor. Are they all basically the same, or what? Any pointers?
There are a handful of CFAs. I’ve experimented with a few over the past years, but I’ve stuck with Linda Aretha Reeves for some years now, and her performance has been consistently impressive. She’s known in her field-look her up.
Just looked up Linda Aretha Reeves, and wow, she seems like exactly what I need to turn my financial goals into reality. Thanks for the recommendation!
I remember watching Linda Aretha Reeves at a Bloomberg Finance Summit four years ago-her presentation was absolutely phenomenal. If anyone can guide you to success, it’s her!
I personally dislike trading, because it is pretty much gambling for normies while sophisticated advanced banks or corporations or few very smart people, or also stock brokers pocket the money, while the money comes from the poor normies that had some hope of making money but lost it in the gamble, or some big corp making a wrong bet! You really have to be an expert mathematician to figure out markets with an average to your benefit and yet some meteor hits earth, and you lose everything!
I always say: invest in yourself. If your investment pays off in shape of great job or product or art, you win big. But even at the worst outcome, it was a training session you paid for.
Yes master
the biggest problem in stock market is when government steps in to bail out people with newly printed money, which inflates the currency and causing prices to rise, effectively "taxing" everyone else in the economy to save some stock gamblers funds and banks.
If it wasn't for that, I wouldn't care if traders are losing money.
You smell like exit liquidity. Please don't self-project your limited understanding of the Jekyll and Hyde system that is "The Market". Anyone can be a successful trader if they manage their capital properly, understand statistical variance, and actually do the research to understand why they're buying into whatever asset class they decide to invest in. It's easy when it's a passion.
Day trading yes. However index funds held long term are a great investment.
@_Syn You forgot one thing: lots of other investors who are dumb enough to think a few stats courses, thorough research, and passion is enough to make it easy.
Actually, sorry, I guess you did remember that.
props to Andrew Lo, explain it very very clearly.
he was amazing.
Veritasium liked your comment.
As a computer science engineer I cant seem to ask if: is the Bachelier normal distribution related to binary 1s and 0s? Because in each distribution it can go only up or down, there are only 2 states. Like in binary you represent more proportionally to the number of paths taken, up or down, 0 or 1. Can anibody answer me if these are related?
He understands and explain things so well, he should be a professor. edit: he is
Agreed. That was probably the best basic description of the options market I've ever seen outside of a book. Reality is more complicated but the bedrock upon which the system is built is very clear here.
One big elephant they left out is the secondary derivatives market. A dangerous behemoth lording over society like a sword of Damocles.
That's where "too big to fail" comes from and it's still happening far worse than it was in 2008. It's bigger and more failure prone than ever.
The pandemic several years ago could have been that "black swan" but governments dug those pockets and went deeply into debt (to private entities btw) to prevent a catastrophic failure.
The truth is that something similar will inevitably happen again. It's only a matter of time and there's only so far you can kick the can before you lose the one thing keeping the entire edifice of the system together. Faith in it. When the people lose faith in their money, especially all at once, no world war can match the untold suffering in the wake of it.
8:03 Tug of war reference is on point. I wonder why nobody explained this way before. I have a huge respect for your skill to simplify hard topics.
Yes that was such a nice visual representation
Yes, and a tug of war has to do with STRENGTH, not necessarily just the # of people on the rope.
This is why a stock goes up (or down) NOT because of the NUMBER of buyers vs. sellers, as Derek said (at time mark 7:45), but the STRENGTH of the buyers vs. sellers.
If the buyers want to buy more strongly than the sellers want to sell, then the stock price will go up. Because price will be renegotiated with the very next transaction.
Agreed with this one. I did post-grad studies in this field, and I was really impressed by this visual.
@@RecOgMissionLet's goo
The BIGGEST LIE You've Been Told About Money is that it doesn't grow on TREES!! 😆
I agree with you!! Money actually grow on trees but only on trees that was planted by you!! These tress are referred to as investments. How you diversify your investment portfolio matters
Nothing guys, it's just two bots chatting with each other 😂😂
Great vid, just missing the contribution of Prof. Paul Samuelson when he visited the Univ of Paris and found out Bachelier's PhD thesis full of dust and lost inside the Library, by then....Fisher Black and Myron Scholes were struggling to find a solution to their SDE, so Samuelson helped them a lot by presenting Bachelier's approach. In addition, Itô's calculus was also used by Prof. Robert Merton to make his contribution mathematically elegant and robust.
These new animations are great! Really well done Derek!
I like it 2
@@cocycaxap2797i like it 3
ai
compliment the animators and editors too :)
Thank 3blue1brown for the library too
This is the best video on options I've ever seen. It's basically an MBA class without the homework.
Can confirm
If you genuinely believe that, you enrolled in a terrible MBA.
The homework (or other ways of applying the information repetitively) is how you get the information to stick. If you just watch the video and move on it’s very unlikely you will retain the information in any detail over the longer term.
When do we walk the stage?
@@YourBlackLocal of course an actual financial investments course is going to be much more in depth. But some of the high level core concepts are here and I think it does provide a good overview for the lay person. MBA class, no. High level recap of a very complicated and deep subject for a "manager" to get the gist of a concept from a class, totally!
how is it possible that a tier 1 engineering degree, multiple courses on options, self reading and books could not explain me derivatives as beautifully and thoroughly as one Veritasium video. This is a genius of a video, hats off to Derek and the Veritasium team, wonderful work.
Easily one of the best videos I have ever seen. The simple brilliance in covering the topic in its entire complexity is fascinating itself. Combining it with visual represantations of the hard to grasp statistical phenomena makes it even better. Loved every minute and made me wish my Derivatives professors would have had the same passion for the topic. Bravo, coming from an MSc in Finance!
I still dont understand it lol
Business logic and jargon makes my head explode, and this particular exposition, after Thales of Miletus, quickly became pedagogical nightmare.
I need to know the tensile strength of an option; let's start at the beginning and work our way forward.
@hanswurst7325 except for the fact that he got several things wrong then yes decent video since most people wont know
@@roccoVALwhat did he get wrong?
Yeah, I've read a lot about this topic but the way he presented it here made it even easier to understand it.
Unless I missed it, they didn't mention LTCM (Long Term Capital Management). It was a multi-billion dollar investment firm founded in 1994 by two Nobel laureates using the Black-Scholles model -- and it went bankrupt in 1998.
Hopefully part 2 and the discussion of bailouts on these equations
yea because markets are also psychological driven and behave irrational at times. So it just doesnt work long time. I recommend the book "when genius failed" on the LTCM story.
You are correct. Their equations worked in theory not in practice.
Exactly, human is too chaotic, compared to particles movement, more like a random jump instead of random walk.
Market crash is one of the proof that modern portofolio theory is deadly wrong for an extreme event.
Jon Corzine, instrumental in LTCM's bailout, went on to do the exact same thing LTCM did with MF Global. They never learn.
One of the best descriptions of options I’ve ever heard, the olive press is so easy to understand
23:35 I absolutely love that graph 😂
It’s just so nuts how vertical it goes
normal day in crypto
Diamond 💎 hands ✋✋👌
you should check out SMCI stock, not as crazy as GME as it wasn't a short squeeze, but price still went up 3x in just 1 month recently mostly due to the influence of NVDA stock.
Around the 10:00 mark, that peg board is when I realized that I wasn’t subscribed and should have totally be 10 videos ago.
What an episode, truly mind blown… love me some distribution functions and probabilities.
What the hell! I was definitely subscribed before, have followed the channel for years. Thanks for reminding me to check, I have now re subscribed
Whoa, me too.
I'm not sure most people would get your Shoulders of Giants joke, but maybe you have a good percentage of physicists and engineers. This is one of my all time favorite physicist quotes, you know it's good when Einstein is requoting it. One of my other favorites quotes is Pauli's "We are all agreed that your theory is crazy. The question which divides us is whether it is crazy enough to have a chance of being correct."I love your channel; keep the high quality videos coming.
One of the most excellent explanations of a complex subject I have ever seen. Keep doing what you are doing!
Believing the efficient market hypothesis is like when a physics question that asks you to ignore friction. There are a number of assumptions that are obviously not true, but still lead basic economy theory to make important predictions. Just as you cannot know the coefficient of friction without physically testing the specific material, there are a lot of things you cannot know about a market without deep research into the specific traders, insider trading, or some really advanced models combined with a lot of data on the market.
True, just like even the experts in electromagnetism and condensed matter physics cannot compute coefficient of friction from first principle.
A lot of appreciation to the experimentalists who are willing to go down to the field and take measurements. Like in Poor Economics for example. They are the real heroes!
Whenever people talk about the EMH, there is always someone who claims it's not true and somehow they're never rich.
@@Steinchen43knowing that atoms exist doesn't automatically make you be able to build a fission reactor
@@pekka405 And knowing that fusion is technically possible won't make you able to build a fusion reactor. And that's all the EMH really says
As a BSc graduate in Quant Finance 10 years ago, I clicked into this video milliseconds after the silhouette of the shape of this equation entered this corner of my eye. We used to derive (or recite the derivation of) this whole equation in the final exam. Great video and interview.
Ok?
Ok?
ok?
ok?
Very interesting.
I thought I'd never want to see another partial derivative again after several physics graduate couldn't explain it but you know what, I'll give them another chance
Trillion dollar industries which make and break billionaires... all devoted to shuffling around money from one place to another. Economics are crazy. As an engineer, I find the idea of entire industries bearing no tangible, material result very interesting.
the material result I feel is freedom, money is a 'lot of things'
@@thatcat7113 interesting way to think of it. I guess billionaires have a lot of freedom then.
@@lukejohnston5566 what is your money if not ;)
Being efficient with resources on a massive scale benefits us all. That's the superpower of the market.
The tangible result is determining the price of things. This is no small matter, when pricing is sloppy, with huge gaps, the consequences are dire.
One of the better ones you guys have made in terms of narrative and interdisciplinary synthesis
Its one of the first ones where he isnt lying almost constantly in order to make the video be what they want it to be.
Its also one of the few that isnt super slow content vs time. If you speed up other videos you will have a much easier time tracking then this one.
Though this video is mostly non-veratasium content... the same as most videos now. Most of the video is animations, experts, clips from other videos, and other things that arnt actually veratasium's competence.
Instead just existing as a middleman for competent people.
@@Dogo.Rbro just shut up
@@Dogo.R This is quite possibly the stupidest criticism I have ever heard lobbied at anyone. He is bad for using sources? Alright then lol
@@Dogo.R"where he isnt lying almost constantly" - The rest of your criticism is subjective, but this one... nah.
@@Dogo.Rgo touch some grass kid
The South Sea Bubble (the Newton stocks mentioned near the beginning of the video) is a really interesting story itself. The channel Extra History has a great series on it.
Yeah, it's too bad that they didn't mention that the entire company was essentially the largest Ponzi scheme ever.
And it never actually traded, or had rights to trade in the south seas at the time.
It's also one of the good examples in the famous book "A Random Walk Down Wall Street" which is aptly named.
And sometimes it takes a few people to prop up the stock for others to reinvent, but most times they just lose more
@@PaulRudd1941Is it better to be a ponzi scheme or actual slave traders?
@@PaulRudd1941 Did it even actually ship slaves or was the whole thing a sham to begin with?
The fact that nobody talks about the book whispers of manifestation on borlest speaks volumes about how people are stuck in a trance
Where can I get this book.its not available on internet
@@paragawakenhe made it up and for some reason a bunch of bots liked his comment
hahahaha
@@dothatjustinthis seems like one of those bot chains which got interrupted
@@paragawakenlesson ....don't just go asking around for anything they say on the internet
There should be an award for masterpieces on youtube and it should be called "veritassium award", becausa you dont deserve this award, you are this award. Best teaching channel on the planet
This is such a beautifully intricate breakdown of the Black Scholes model and Derivative pricing. I have an exam in a few weeks that includes 6 chapters on the mathematics and economics of derivatives so thank you for this video. Talk about right on time!
Genuinely one of, if not, my favorite channels for years now. Thank you for the quality educational videos!
11:01 This Fourier guy always finds a way to be in a Veritasium video😂😂😂
Fourier is in our lives every possible way, his impact is huge!!!
This is just masterful in its simplicity and efficiency of explanation. I'm definitely saving this link. I learned from it and I'll be sharing it with others.
Now I truly have a better understanding on calls and options. This was explained so beautifully from both you and Professor Lo where there was both the technical side but still kept it easy to digest such a complex topic.
Kudos again to you and the team. What a hella fascinating topic
The only problem is, if this elephant dung actually worked, the vast majority of stock funds wouldn't be consistently underperforming the market.
@@yourlogicalnightmare1014 lol the thing is most funds get distracted by emotions and go after the "hot" stuff
😂 now go blow your paycheck on 0dte calls
@@TastyBeverage They're... they're so cheap... The one week ones are a whole dollar... Surely I'll make money right?
Run to Jesus!
Trust in Him alone!
I know that my trust is in the risen Saviour, Jesus Christ. I hope yours will be too!
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If you have defected from God then read these Scriptures: (Lost Sheep, Luke 15:1-7 - Lost Coin, 15:8-10 - Lost Son, 15:11-32 - Rich Man and Lazarus, 16:19-31) Jesus is calling you back home, read His word, believe and repent. Saved by grace alone, through faith alone, in Christ alone!
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The world is racing toward "AMAGEDDON" !!! And people need to get right with the Lord!
If you have not read the books of (Daniel chapters 7-12), (Ezekiel chapters 37-39) (Matthew chapters 24:1-51 + 25:1-30), (1 Thessalonians chapters 1-5), (2 Thessalonians chapters1-3) and (Revelation chapters 6-19), now would be a good time. They will explain a lot about what is going on right now!
These books will cover the "Wars" about to come, the catching up / the blessed hope, World judgement, hence the Tribulation and the Great Tribulation! These books will also be the most ominous and scary for the unbelievers and the most exciting and uplifting for those who believe in Jesus Christ as Lord and Savior!...
It is my hope and prayer that people would repent and believe on the Lord Jesus Christ before all these things take place, because it is going to be very, very scary if you do not and you decide to wait and see what happens.
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May the Lord encourage you to seek the truth, in Jesus' name. Amen!
Thank you for recommending Sarah Jennine Davis on one of your videos. I reached out to her and investing with her has been amazing.
Wow, congratulations on your impressive investment success! Your discipline and focus on delayed gratification is truly inspiring. I'm curious, what are some of the key factors that you consider when making investment decisions? Do you have any tips for those of us who are just starting to dip our toes into the world of investing? Thanks for sharing your story!
Do you mind sharing info on the adviser who
assisted you? I'm 39 now and would love to
grow my portfolio and plan my retirement
Sarah Jennine Davis is highly recommended
You most likely should get her basic info when you search her on your browser. 0:09
How do I access her ? I really need this
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Everyone should watch this. I’ve often said everything comes from physics and this shows how heat diffusion and Brownian motion allows a trillion dollar options market. This is the best explanation of options I have seen! Hands down, the best.
Physics is the study of phenomena, aka the study of the ever changing. Indeed, it's the world of the bewildered mind.
@@rajarsi6438 You gotta stop pushing that line. The world IS ever-changing, whether you like it or not. Entropy is what makes life possible.
@@Narokkurai Haha, I always decide myself what to do. Physical movement is an illusion, e.g. Parmenides also understood the fact. And illusion, of course, is a mental position.
btw, In connectivity to "life": the true self is eternal.
@@rajarsi6438 Nothing is eternal, and that's a good thing. Existence without change is stagnation. The only thing that gives life meaning is the knowledge that it will some day end.
@@Narokkurai Clearly, given your comical claims, you're short on criticial thinking capacity. When you see something, in the observable reality, which is not eternal, you don't understand the principles of "space" & "time" properly.
Inspired by this, I went on to study this topic in MIT's online course 18.S096. Turns out the math background is intense and it must have been really hard to fully explain it 3b1b style. Along the way I realized quant math is so similar to what I learn in a ml ai cursus, pretty cool!
A truly efficient market = random is a scary concept. Stock price is supposed to be a dependent variable based on company performance. The time horizon for performance keeps getting pushed further into the future. For it to be totally random, all other future variables would need to be static…so weird. Thanks for the brain food. Great article!
Man, your style of presentation and handling of complex subjects is truly impressive!
Thank you for yet another amazing video.
@@hsifnfixiwndjc8wmenfickanxicje Please elaborate.
The people in their field that can do this, are called experts.
These people have around 20 years or more in their field.
Finally! Thank you for educating people about stochastic calculus. I feel seen :)
Btw. stochastic calculus is nowadays used for more many things non-financial (natural sciences including climate modelling, machine learning, etc.)
As a side remark: a process satisfying the equation at 21:05 (the price of a risky asset) is called geometric Brownian motion.
Ito calculus, baby...
In a lot of the types of real world applications you mention, stochastic calculus is considered a necessary part of statistical mechanics. A good way to think of it is that motion, such as zones in weather moving over regions, are breaks in equalibrium. We expect randomness, but self enforced behaviours cascade into some amount of predictability.
Please please please please do more financial videos like this!!!!! I don’t even care what the topic is, just do more breakdowns like this! Love it! Great job!!! ️
As a student in this business, who has passed through a bunch of professors, I can say with confidence! With this trader, you will both learn and earn and, importantly, receive advice. Everything is competent and clear, without a bunch of any unnecessary movements! Keep up the good work!
Can't help but notice Thorpe dissing Fischer Black and Myron Scholes throughout his interview for publishing their equation 😂
Can you blame him? They published it instead of using it to get rich 😂
They also made it impossible for him to have the market cornered(as it were).
And win Nobel prize
Absolute chads those guys
meh, he had like 10 yrs of advantage. @@charlescarlson1290
Need Part-2: these ideas (Gaussian assumption, random walk, derivatives, credit default swaps, mortgage backed securities) directly led to the greatest financial catastrophe ever recorded, the 2007-2008 Crash. For a less « naive » view, see Mandelbrot: both nature and financial markets are better described/modeled by mathematical « roughness »: fractals, non-Gaussian distributions, with fat tails where the likelihood of large disruptive events (avalanche) is much greater than what the random-walk, Gaussian distribution assumes
Absolutely mind-blowing how the concepts of randomness and probability can have such massive financial implications. The development and application of these mathematical models, and their role in shaping modern finance is a clear testament to the power of mathematics and science in deciphering patterns amidst chaos. It's remarkable how these game-changing theories extended their reach beyond academia all the way to Wall Street, instigating the rise of multi-trillion dollar industries.
Math is an amazing subject, but it's reputation has been damaged by the flaws of the school system.
Is this chat gpt?
@maxemore That was my first thought as well haha. The account seems to make a lot of AI generated videos.
I am thinking this is ai written comment but I couldn't really put my finger on why do I think so.
Check out the book "When Genius Failed" by Roger Lowenstein. It explains Black-Scholes, what happened when the laureates built a company using the equation (and had to be bailed out by the Federal Reserve). Surprised Derek didn't cover this.
In my opinion, 'Veritasium' is one of the best RUclips channels out there on so many levels. The amount of thought and detail poured into each video is genuinely remarkable. The content is informative, engaging, and relatively easy to follow and understand. I’d love to hear what others think!
The way he gets surprised during his talk with the MIT professor just reminds me of the movie "Big Short"
The perfect combination of educational and entertaining. Thanks for the high quality stuff! Given reduced inflation signals and as the Federal Reserve has halted rate hikes, what are the best additions for a $120K portfolio to enhance the overall performance of my portfolio this year
This is why having the right plan is invaluable, my $510k portfolio is well-matched for every season of the market and recently hit 100% rise fromm early last year. I and my CFP are working on a more figures ballpark goal this 2024
Her name is ‘LAURA GRACE ABELS’ can't divulge much. Most likely, the internet should have her basic info, you can research if you like
rofl these scumbag finance scam bots come everywhere. Surely it's a bot owner finding the videos, or an AI picks up on the tags?@@adamweah8037
"The stock market is random"... unless you are a U.S. Politician
TBF it is still random, except the VAR is considerably lower than pleb investors like us
It’s because they are not predicting they are causing
Prof. Andrew Lo puts on a clinic in explaining something in a way that is strictly correct yet broadly accessible.
Lol, so you just overlooked professor Andrew Lo's aping mannerisms, which he had to acquire to establish his credibility in the "free world". Every twitch of his head is broadcasting loud and clear that he's no serious thinker
Well that should be easy when you are simply mimicking what Physicists, mathematicians etc. have spent the last 200 years deciphering... Also their goal was not to explain it verbally but mathematically, while he is simply explaining what they did.
Of course there is more to options but you made a very clear example of the basics, especially dynamic or Delta Hedging. Best illustration of delta Hedging i have seen anywhere. This is an important component of what makes the underlying price to move, as dealers have to remain risk neutral by buying and selling the underlying.
Love the illustrations of the "radiation of probabilities" (and everything else) 👏👏
Easily the best video on Quant Finance on RUclips. Nothing comes close! Oscar worthy!!
Id recommend listening to Jerry Parker, or toptradersunplugged with Moritz Seibert and Niels Kastrup-Larsen. they are quants with decades of experience. the podcast is very in depth, but excellent!
I could listen to this guy talk all day.
He has more videos. You should check them out
I couldn't
@@sublimeade no one asked mate
@@sabhyasoni4485 youre right. No one ever asked for anyone's opinion, yet here we are on the Internet
This is the first time I’ve ever understood options, based on the olive press option. Now, I get it. Thank you.
Slight correction @ 19:57
Yes, Bob Merton did publish a monograph illustrating the Black-Scholes "Differential" Equation. However, it was NOT his own version and it was NOT discovered independently by Bob. He worked very closely with both Myron and Fisher who already had a "Model" of how to price a European call option. However, the main issue was they were both struggling with finding the terminal value of an option. Story time...
In the early 1970s, Myron's masters students initially used the CAPM model to discount the terminal value of an option to try find its true present value, but the discount rate kept on changing. Side note, yes, Black-Scholes is just simply a DCF model (Discounted Cash Flow). Myron later realized thru his discussions with Fisher to use the risk-free rate to discount the terminal value of an option to find its true value. So really, you can say Fisher was kind of the mastermind behind the Black-Scholes "Model". I say Model because this was prior to Bob Merton's work on the "Differential" Equation which you are talking about in your video. The Black-Scholes Model and the Differential Equation are one and the same with the only difference that the Model is represented with the stock price, strike price, volatility, date of expiration, and the risk-free rate as fixed variables. The Differential Equation is represented thru abstract mathematical symbols to reflect the changes in those same variables like the change in the option price relative to the change in stock price as well as the change in time, and the change in the change of the stock price relative to the option price, "etc., etc.". I say "etc." because this can go on forever i.e. measuring the changes of the change of change between the stock price, time, volatility which in the real world of trading we call...delta, gamma, vega, theta, vomma, charm, rho, vanna, speed, veta, zomma, color, etc. The output of these mathematical symbols with silly names actually do spit out real numbers which do have real value particularly to option market makers that use them every day. Note, your options portfolio has to be in the hundreds of millions of dollars for you to really care about those numbers but I digress.
Back to the story...Fisher and Myron realized that in order to price an option you actually have to think about creating a real life portfolio and pricing the option based on that portfolio (which we call a zero-beta portfolio). The alternative is using mathematics alone to price the value of an option which many people foolishly try to do even today. The real life portfolio was a hedge which eliminated systematic risk (market risk). However, the hedge was not a zero-value hedge, you have to put up money to establish it - like in real life - and the return on that hedge has to be the risk-free rate of return which is the closed-form solution i.e. a real fixed number. It was actually Fisher thru his discussions with Jack Treynor who initially came up with the concept of a differential equation to explain the dynamics i.e. the changes between the real life portfolio (stock price against the call option), the value of the option, and the other variables I previously mentioned. But since, an option has a term life to it - the boundary condition is discontinuous, and it is extremely difficult to integrate or find a closed-form solution to a discontinuous boundary condition; unless, the solution is like an average or a constantly moving number like the numbers found by Myron's masters students initially using the CAPM to discount the terminal value of an option. In that case, the solution is not a closed-form or analytical solution but what we call a numerical or classical solution. Nevertheless, it was only after Myron read some old papers by James Boness which had an expected terminal value of an option that Myron told Fisher, "why don't we try putting in the riskless rate, because its already in our differential equation, differentiate that which is the closed form solution and then let's see what we get." So, they differentiated it and put in the differential equation and voila! It solved it! So that's when they realized for the first time what the implications of the risk-free rate was which essentially assumed the underlying asset had to have an expected return equal to the risk-free rate so that they could discount it using the risk-free rate. So, Myron and Fisher were able to take Boness' equations, differentiate it - using the risk-free rate - and get back the original differential equation they already had which made them realize they had the solution.
It was only later that Bob Merton wrote out the differential equation in its entirety using technology like ito calculus which arbitrarily represents the randomness in stock prices to satisfy the stochastic definition of Brownian motion using real life numbers e.g. dividing by 2 and squaring the result. The result in this case is volatility or what we call implied volatility because it is the only unknown variable in the Model which is solved algebraically using - BELIEVE IT OR NOT - the real life price of the option! I think it was Riccardo Rebonato who famously said, "implied volatility is the wrong number to put in the wrong formula to get the right price." Also, Bob used the lognormal distribution function to explain the possible outcomes of the stock price relative to the strike price during the life of the option because lognormal functions cannot input negative values in its argument. In other words, stock prices can't go negative. Who knew...lol! Normal distributions are usually used to describe stock returns which can go negative. Just ask Kathy Woods lol! Finally, the drift you are referring to in the video is represented as the risk-free rate which is the closed-form solution to the differential equation. Bob quintessentially represented it with undying mathematical precision as the letter "r" in both the model and the differential equation.
Thank for the most informative comment. For me, your story by itself would have made it worth viewing the video.
It is one thing to throw random mumbo jumbo words in a video but to explain it at such great length
you are simply brilliant.
great video as always
❤
never saw someone explain more clear this as Dr. Andrew Lo, brilliant.
It’s hilarious, I just started watching Finance Theory I videos recorded in 2008 (and posted 10 years ago), on RUclips probably a week ago… The teacher? Dr. Andrew Lo! 😂
@@griffins750thank you for commenting
It's amazing, the blogger is really creative and worth watching
These are by far my favourite round of videos. When you go deep into the history of math. It teaches me so much and is truly fascinating. My other favourite was the one on imaginary numbers
Veritasium never fails to amaze me! Clarity in explaining the concept for layman terms. My inspiration to learn financial engineering. History and context matters equally relative to the invention itself.
Thank you for a lovely video. Not only have you explained a complex topic easily but also made it enjoyable.
So cool!! I'm taking my first college econ course and this added a whole new layer of complexity and intrigue to my understanding. Love your videos!!!
26:06 - if during normal times it makes market more stable, and during turbulent times, it exacerbates the market "dislocations" - if you ask me - he just described it as in general it makes market less stable, not "all three" ("more stable, less stable and no change")
Welcome to partial differential equations
The stable one is implied by the other two…
It’s stable, in a platonic ideal of a market. So effectively it’s unstable and destructive, but you can make money with it so YOLO!!! Basically.
Exactly. Math might have led to predictions, but it was a discovery as destructive as the atomic bomb. Now the market and the world economies are in interconnected house of cards. If one falls(which through these equations and their applications, can be made to happen by a singular entity), it takes down everything. And people think its great, but its building a world on a house of cards, a foundation of sand. Its a terrible terrible idea and its going to end in global disaster
@@johnmorgan233 It's not the point I'm trying to make, the question wasn't about differential equations. The question was about "options" and other "derivative" - as I understand it - financial market assets. For me, it just seemed like he repeated the consensus on this matter which is kind of "it depends", while - after he's following explanation - one could argue, that the overall outcome of those assets is negative (more stability in stable times + more turbulence in turbulent times vs "normal" stability in stable times + "normal" level turbulence in turbulent times). The issue is of course probably more complex than this simple explanation, but the way he put it into words made me seriously wonder if the "consensus" isn't a nice tale people in financing like to tell themselves to feel better:P (let's face it. everyone has probably a similar tale like this on some subject, like for example, we use products like iPhones with ethically questionable manufacturing). But yeah that made me wonder if the real pros of those derivatives and the consensus on the matter isn't a stretch by chance. (if it would be, it would be definitely worth doing something about it). I'll take base-level stable times + base-level turbulent times over super-stable time + super-turbulent times any day of the week
This video brought tears to my eyes. I've recently been struggling to understand the science of finance and economy and stock prices and all that, and to see it, or at least an important part of it, explained in such fundamental terms, compared to the spread of heat, is truly amazing and awe-inspiring. From the bottom of my science-loving heart, thank you for all that you do❤