The Midas Formula: Trillion Dollar Bet

Dec 8, 2023 | Economics, Videos

In 1997, Fischer Black, Myron Scholes and Robert Merton created history by producing the most renowned formula in finance: the Black-Scholes-Merton options pricing model. This remarkable achievement was rewarded with Nobel Prizes in Economics for both Black and Scholes. A year later, their hedge fund Long Term Capital Management (LTCM) had suffered a catastrophic collapse due to extensive leverage of their strategy which resulted in losses of up to $100 billion.

The story behind this major event is vividly explored in the documentary “When Genius Failed,” which is an absolute must-watch for those interested in understanding the mechanics behind financial markets and seeking lessons from LTCM’s collapse. The documentary provides insights into the innovative quantitative strategies employed by LTCM as well as its close connections to Wall Street’s most prominent firms, all while providing an eye-opening exploration of the fundamental flaws that caused its eventual downfall.

Moreover, “When Genius Failed” serves as a powerful reminder of how seemingly sophisticated models can be rendered meaningless under certain conditions, especially when combined with excessive risk-taking. It also sheds light on the important role that human judgement should play when constructing and managing investment strategies—a lesson which has proven invaluable for many investors since then.

For these reasons, “When Genius Failed” stands as a timeless piece of work that is equally informative and entertaining; one which should not be missed by anyone interested in exploring finance’s greatest success stories—and failures.

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David B