Risk Expert Calls For LTCM Pair To Lose Nobel Prize

Oct 13 2008 | 1:31pm ET

On the day that New York Times columnist and Princeton University professor Paul Krugman was awarded the Nobel Prize in economics, one former hedge fund manager is calling for the revocation of another hedge fund pairs' prize.

Nassim Nicholas Taleb, the former owner of hedge fund Empirica and current risk engineering professor and best-selling author, told National Public Radio's Morning Edition that the current market turmoil proves that the stock-option valuation process that Robert Merton and Myron Scholes won a Nobel for in 1997 doesn't work. And he wants that prize revoked.

Merton and Scholes, of course, were the brains behind Long-Term Capital Management, whose collapse in 1998 was the largest-ever hedge fund failure at the time. According to Taleb, the risk management failures that torpedoed their old firm have now helped to torpedo Wall Street by leading investment companies to believe (wrongly) that they were insulated from risk.

Earlier this month on CBS' 60 Minutes, Taleb said the "use of probabilistic methods for the estimation of risks did just blow up the banking system."


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