Question re. Famous Quotes

Chris Patten wrote* this:

"... it is surely laughable when the highest awards are showered on those who promote the most gimcrack schemes to make themselves rich, at least for a while. The geniuses who invented the pyramid of derivatives at Long-Term Capital Management were awarded the Nobel Prize for their cleverness, not long before the whole edifice came crashing down with the financial community digging deep into its pockets to pre-vent too much collateral damage. To every excess, there comes a reaction."

Does somebody know the background of that citation? The maths finance faculty of Oxford University still trains Black-Scholes computations, "gimcrack schemes".

* Reference:
Chris Patten, Baron of Barnes, Chancellor of Oxford University, last Governor of Hong Kong, EU Commissioner: "Not Quite the DIPLOMAT, Home Truths about World Affairs", Allen Lane/Penguin Books © Chris Patten, Nov. 2005, p. 218

Interested in stochastic evaluation models?

Hypothesis: Volatility says less about the future than international accounting rules suggest.

Disclaimer: This blog doesn't make any statement about commercially published volatility indexes, registered as trademarks. The 'real' volatility, measured ex post, is used and discussed instead (backtesting).

Key findings: The point is that neither the "real" volatility does produce successful predicting, nor does it make sense to "estimate" future volatility for that particular purpose.

The idea is to encourage a critical discussion. I am just starting and wondering how to furnish my point effectively. I will start with stories

The Lotto story: The state owned Lotto organisations in Germany reported a turnover of 3,9 Billion Euro for the first half of 2006. Lotto returned 1,9 Billion Euro to the Lotto gamblers which is 48,7 per cent. Lotto has to spend 50 per cent for "good causes" - anything that (better) doesn't require parliamental approval. The rest of 1,3 per cent (which is an amount of 50 million Euros still) is for admin and board meetings in fashionable locations.

The point: If someone makes a Lotto bet - say - for 10 Euro he looses 51,3 per cent or 5,13 Euro in the very moment he hands the 10 Euro bill over the counter. In the long run (Law of large Numbers) he can be sure to receive 4,87 Euro back. This is the stochastic, expected value. Why does he do that? I think he pays the 5,13 Euro for the dream to eventually become a miilionnaire. There is no other rational. The same applies to derivatives. Derivatives prices must have a dream component also.

Lotto consists of 49 bullets carrying the numbers 1, 2, ...49. Since Oct. 1955 every Saturday six bullets are drawn arbitrarely. The individual chance of a bullet to be drawn is 12,2% (6/49). Lotto statistics as of June 2005 show 4762 drawings in total: Theoretically one would expect that each bullet would have been drawn 531 times but the actual range was from 471 times (bullet 13) to 582 times (bullet 38) approximating a "volatility" of 3,2 per cent. The bandwidth is around minus/plus ten per cent.
Currently Lotto is in the media focus since it suffers from private competition: Bwin (or Bet & Win) owning a bizarre licence granted by the former DDR took a 40 per cent share.