Ep 13. Trillion Dollar Bet

Trillion Dollar Bet is the 13th episode of the 27th season of the popular documentary television series NOVA. In this episode, NOVA explores the fascinating world of finance and how a group of mathematicians and scientists attempted to use their knowledge to predict the stock market crash of 2008.

The episode begins by introducing viewers to the Black-Scholes formula, a mathematical model developed in the 1970s for pricing options contracts. Options are essentially bets on the future price of stocks, and the Black-Scholes formula made it possible to determine the value of those bets with a high degree of accuracy. The formula revolutionized the financial industry, allowing traders to price options in real-time and make trades more quickly and efficiently than ever before.

But in the years leading up to the financial crisis of 2008, a small group of mathematicians and scientists began to question the accuracy of the Black-Scholes formula. They argued that it was based on a flawed assumption – that the markets were efficient and always priced assets correctly. In reality, the markets were often irrational and driven by fear and greed, and predicting future prices was incredibly difficult if not impossible.

Undeterred, this group of thinkers continued to refine their models and search for a way to predict market crashes. They included the likes of David X. Li, a mathematician at a small financial services company, and Emanuel Derman, a physicist-turned-financial-engineer who became a leading voice in the field.

As the documentary explains, these individuals and others began to develop new models that took into account more than just the prices of assets. They looked at things like market volatility, investor sentiment, and other factors that could affect asset prices. And they began to see patterns and trends that suggested a crash was imminent.

The documentary then takes viewers through the events of the financial crisis itself, as well as the aftermath. It explores the impact of the crash on ordinary Americans, the efforts to bail out the financial sector, and the ongoing debate over what caused the crisis in the first place.

Throughout it all, the documentary maintains a focus on the people – the mathematicians and scientists who tried to predict the future of the markets and the traders, bankers, and others who worked to profit from it. It also raises important questions about the role of mathematics in finance and the dangers of relying too heavily on models that can never fully capture the complexity of the markets.

Overall, Trillion Dollar Bet is a compelling look at the intersection of finance and science. It offers a behind-the-scenes look at the people and ideas that drove the financial industry forward, as well as the resulting consequences – both positive and negative. Whether you're a finance expert or someone interested in the forces that shape our world, this episode of NOVA is not to be missed.