Warren Buffett: Black-Scholes Formula Is Total Nonsense

Warren Buffett has talked extensively about options, and in this video he turns his attention to the Black-Scholes Model for option pricing, of which he is highly critical.

[IsomerSoma]

"Black-Scholes Formula Is Total Nonsense" that's not a faithful summarization of buffets statement here at all

[chavruta]

The problem with stock options is that they are time based. Its hard enough to predict a stocks future. Predicting the timeline of the future just makes it harder.

[Floorguy]

Options: What they don't mention is that the "loser" on the other end of the long term option is probably hedging systematically, buying the underlying stock when low and selling when high. The long term holder may also be selling shorter options and themselves collecting premium over and over again. Over time they may have very well made a lot more than the premium they paid. Just because you buy an option doesn't mean you just statically sit on it until expiration.

[chavruta]

You have arrived when you are asked to be on an advisory panel and during the panel, feel totally at ease munching on snacks.

[brianlara]

"we are know-nothing guys; but every so often, we know something" ... that is a nugget of genius

[moviesofchackojaison]

Wonderful to see these elderly people so happy and healthy at this age, very active, enjoying what they like

[REPay]

Just love the relationship dynamics between these two. Serious brain power and integrity.

[Floorguy]

Just a side note: Note: Warren Buffet made a killing investing $5 Billion cash in Bank America. He got $5 billion in preferred stock, AND he also got options to purchase 700 million shares at a strike price of $7.14. He made a ton of money....with options.

[Roscoe]

Charlie is just sitting there munching on lumpchucks of toast. Don't bother him.

[pj_ytmt-]

Well, I guess the video's title was not thought up by a market maker. 😄

[EllenGreidinger]

Black-Scholes may not be the best to use, but you're not excused from building probability into your valuation process.

[fmfbrestel]

Best insights in the video are the employee (especially executive) compensation discussions at the end.

[bodhisoha]

The one true thing Buffet said is that people in academia like greek letters because it gives them the aura of the priesthood, like they are the high priests and the rest of the unwashed who don't know latin or greek are the laity who have to kneel before them. And this not just, especially not just, in business matters. The revolving door between certain institutions of "higher" learning, government and corporate boards has created an untouchable Mandarin class in this country that is very much like the European nobility our country's founders sought to abolish.

[bluegtturbo]

Maybe not... But smart people will always use black holes..

[lazchapman]

You're 1 out of 100 example was likely a directional trade, very little based on value .Black Scholes evolved overtime. People I know who made money over time all used a version like black scholes. I did trade for a dozen years with a man who was a two time world bridge champion. He didn't use any model and did very well.Yet, he could only be a follower of other traders making markets . He couldn't give prices on the opening he was clueless in terms of making markets correctly.That's all I did .make markets all day every day using the black scholes model. Options are not always priced on historical averages of volatility, but implied volatility that occurs all of the time. In my time on the floor I don't recall failing to make a market.

[OriginalIntentDoc]

Robert Reich, at timecode 7:50 Warren Buffett discusses how CEO compensation is determined. This is a very interesting discussion. Buffett maintains executive compensation is determined by "compensation commitees, " not the market. What do you think?

[b.]

No mechanical formula works in the long term. Because stock market is an open system. Anything can happen any time. This mechanistic formula vs open system was even the main topic of the sci-fi book Foundation. Very strange that Nobel Prize winners couldn't see this simple fact.

[shankarbalakrishnan]

The good bit about being born with leadership is people won't chew your soul❤❤🎉🎉

[hammerfist]

Like every tool, scientific theory, mathematical equation, it has its uses and its limitations. It's quite useful for quickly benchmarking if an option, or derivative is not financially viable, but the assumption is the underlying asset is properly valued and rated. So it's going to suck quite badly when used to bet the farm that you can scam investors forever by selling them AAA-rated junk bonds.

[scientious]

It's interesting to get confirmation from Buffett.