October 25, 2018

Financial Mathematics and Ultimate Frisbee

Mike Lawler talks about the most influential paper in his career in finance, teaching math to his kids and ultimate

A red frisbee in a clear blue sky — Bennett *Flickr* (CC BY-SA 2.0)

This article was published in Scientific American’s former blog network and reflects the views of the author, not necessarily those of Scientific American

In the latest episode of our podcast My Favorite Theorem, my cohost Kevin Knudson and I talked with Mike Lawler, who works for the insurance division of Berkshire Hathaway. You can listen to the episode here, at kpknudson.com, where there is also a transcript, or on other podcast delivery platforms.

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Dr. Lawler has a Ph.D. in math but left academia to work in the insurance industry. But Kevin and I met him through his blog, Mike's Math Page, where he documents the creative ways he introduces advanced math concepts to his two kids.

Dr. Lawler’s favorite theorem is not exactly a theorem. He decided to talk about Zvi Bodie’s paper “On the Risk of Stocks in the Long Run,” which has been influential in the way he approaches his post-academic work. The main idea of the paper is that the cost to insure an investment in the stock market goes up the longer you want to insure it, which is at odds with the popular view that investing in stocks is less risky the longer you plan on holding them. (Please note, this post is not investment advice.)

In addition to Bodie’s work, Dr. Lawler mentioned Louis Bachelier, a French mathematician whose thesis is considered one of the founding documents in the field of financial mathematics. You can read his thesis in French or English or an analysis of its importance by Jean-Michel Courtault and coauthors in honor of the centenary of the work. Dr. Lawler also talked about the Black-Scholes model for pricing derivatives and the books All the Devils Are Here by Bethany MacLean and Joseph Nocera and When Genius Failed by Roger Lowenstein.

In each episode of the podcast, we ask our guest to pair their theorem with something: food, beverage, art, music, or other delight in life. Dr. Lawler went in a direction we haven’t had before on the podcast by pairing it with an athletic journey, specifically thinking of ultimate frisbee player Anna Nazarov, who wrote about how it felt to be cut from Team USA several years ago and then came back to get on the team again. You’ll have to listen to the episode to hear why her journey is the perfect pairing for Dr. Lawler’s favorite piece of mathematics.

You can find Dr. Lawler on Twitter and at his blog Mike’s Math Page, where you can get inspiration for talking about math with the kids in your life. If you'd like an introduction to the role of math in financial markets, he recommends Edward Thorp's book A Man for All Markets. You can find more information about the mathematicians and theorems featured in this podcast, along with other delightful mathematical treats, at kpknudson.com and here at Roots of Unity. A transcript is available here. You can subscribe to and review the podcast on iTunes and other podcast delivery systems. We love to hear from our listeners, so please drop us a line at myfavoritetheorem@gmail.com. Kevin Knudson’s handle on Twitter is @niveknosdunk, and mine is @evelynjlamb. The show itself also has a Twitter feed: @myfavethm and a Facebook page. Join us next time to learn another fascinating piece of mathematics.

Previously on My Favorite Theorem: