Mathematical Finance - Criticism

Criticism

Over the years, increasingly sophisticated mathematical models and derivative pricing strategies have been developed, but their credibility was damaged by the financial crisis of 2007–2010.
Contemporary practice of mathematical finance has been subjected to criticism from figures within the field notably by Nassim Nicholas Taleb, a professor of financial engineering at Polytechnic Institute of New York University, in his book The Black Swan and Paul Wilmott. Taleb claims that the prices of financial assets cannot be characterized by the simple models currently in use, rendering much of current practice at best irrelevant, and, at worst, dangerously misleading. Wilmott and Emanuel Derman published the Financial Modelers' Manifesto in January 2008 which addresses some of the most serious concerns.
Bodies such as the Institute for New Economic Thinking are now attempting to establish more effective theories and methods.

In general, modeling the changes by distributions with finite variance is, increasingly, said to be inappropriate. In the 1960s it was discovered by Benoît Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lévy alpha-stable distributions. The scale of change, or volatility, depends on the length of the time interval to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard deviation. See also Financial models with long-tailed distributions and volatility clustering.