[All art by Tatiana Plakhova. Review in pdf here]
Élie Ayache, The Medium of Contingency: An Inverse View of the Market,
Palgrave-Macmillan, 2015, 414pp., $50.00 (hbk), ISBN 9781137286543.
Ayache’s project is to outline the ontology of quantitative finance as a discipline. That is, he wants to find what distinguishes it as a genre, distinct from economics or even stocks and bonds—what most of us associate with ‘finance’. Quantitative finance, dealing with derivatives, is a whole new level of abstraction. So Ayache has to show that economic and social concerns are exogenous (external) to derivative prices: the underlying asset can simply be treated as a stochastic process. His issue with probability is that it is epistemological—a shorthand for when we don’t know the true mechanism. Taleb’s notion of black swans as radically unforeseeable (unknowable) events is simply an extension of this. Conversely, market-makers—those groups of people yelling at each other in old movies about Wall Street—don’t need probability to do their jobs. Ayache’s aim is thus to introduce into theory the practice of derivatives trading—from within, rather than outside, the market. And it’s reasonable to think that delineating the ontology of this immensely rich field will yield insights applicable elsewhere in philosophy.
This is not a didactic book. People coming from philosophy will not learn about finance, nor about how derivatives work. Ayache reinterprets these, assuming familiarity with the standard view. Even Pierre Menard—Ayache’s claim to fame—is only given a few perfunctory mentions here. People coming from finance will not learn anything about philosophy, since Ayache assumes a graduate-level knowledge of it. Further, Ayache’s comments on Taleb’s Antifragile are limited to one page. The only conceivable reason to even skim this book is that you’d like to see just how abstract the philosophy of finance can get.
I got interested in Ayache because I write philosophy of economics. I wanted to learn what quantitative finance is all about, so several years ago I read through all his articles in Wilmott Magazine, gradually learning how to make sense of sentences like “Only in a diffusion framework is the one-touch option…replicable by a continuum of vanilla butterflies” (Sept 2006: 19). I’ve made it through all of Ayache’s published essays. Now I’ve read this entire book, and I deserve a goddamn medal. I read it so that you don’t have to.
Much of Ayache’s reception so far has been quite silly. I recently came across an article (Ferraro, 2016) that cited Ayache’s concept of ‘contingency’ as an inspiration behind a game based on sumo wrestling. (You can’t make this stuff up.) Frank Ruda (2013), an otherwise respectable philosopher, wrote a nonsensical article comparing him to Stalin! Philosophy grad students occasionally mention his work to give their papers a more ‘empirical’ feel (which is comparable in silliness to the sumo wrestling), especially Ayache’s clever reading of Borges’ short story on Pierre Menard—from which these graduate students draw sweeping conclusions about capitalism and high-frequency trading.
Ayache expects the reader to have already read The Blank Swan, which itself is not understandable without reading Meillassoux’s After Finitude. Thus, for most readers, decreasing returns will have long set in. My goal here is to summarize the main arguments and/or good ideas of each chapter, divested of the pages and pages of empty verbosity accompanying them. I try to avoid technical jargon from finance and philosophy except as needed to explain the arguments, though I do provide requisite background knowledge that Ayache has omitted. So first, let’s cover the most important concepts that the reader may find unfamiliar.