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Taking the FloorModels, Morals, and Management in a Wall Street Trading Room$
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Daniel Beunza

Print publication date: 2019

Print ISBN-13: 9780691162812

Published to Princeton Scholarship Online: May 2020

DOI: 10.23943/princeton/9780691162812.001.0001

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Models and Reflexivity

Models and Reflexivity

Chapter:
(p.73) 5 Models and Reflexivity
Source:
Taking the Floor
Author(s):

Daniel Beunza

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691162812.003.0005

This chapter considers what the distinctive advantages of using economic formulas on a trading floor are. It introduces Max, a senior trader at the merger arbitrage desk and a mathematically gifted trader. Max bet on whether announced mergers would actually be completed. More importantly, he was able to combine stock prices with economic models, plot them on a Bloomberg terminal, and estimate his rivals' expectations about a pending merger. He then used these inferred expectations to refine his own estimates of merger probability. This allowed him to test his own hypothesis against the rest of the market, question his assumptions, or ponder what he might be missing. Such possibilities reduced the risk of mistakes in Max's bets, allowing him to take larger positions and realize higher returns. The case of Max revealed what was truly new, different, and to some extent magical, about the use of models in trading.

Keywords:   economic formulas, reflexivity, mergers, stock prices, economic models, Bloomberg terminal, merger probability

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