168 THE BiG DROP
gets it back in the air at the last second. We were just hours
away from closing every financial market in the world.
That’s how severe it was to the world financial system.
That’s how devastating it was to me personally. From that
experience I realized there something wrong with modern fi-
nancial theory. I knew there was something wrong with risk
management on Wall Street. If they knew what they were do-
ing, LTCM never would’ve happened.
It took me ten years. I spent five years figuring out what
was wrong in the existing models. Then it took me five more
years to figure out what did work. I said, “Well, if those other
models don’t work, what is the model that does work? What is
the way to approach financial markets?”
I spent time in taking courses in applied mathematics,
physics, network theory, graph theory and complexity theory.
It was good timing too, because by the time of the panic of
2008, I was able to see the crisis ahead of time.
I gave a series of lectures in 2005, 2006, 2007 warning
about it very explicitly.
I said that the crisis is coming, that it will be bigger than
1998 and more devastating. I’m glad to say that thanks to my
understanding of risk and complexity I did not lose any money
in 2008. But I only saw it coming because of my experiences in
1998 when I did lose money and I had a disastrous outcome.
I considered that paying tuition for an education that enabled
me to see what was wrong with modern finance.■ Complexity Theory
My use of complexity theory in understanding risk in capi-
tal markets arose as a direct consequence of my involvement
with Long-Term Capital Management, LTCM, the hedge fund
the collapsed in 1998 after derivatives trading strategies went
catastrophically wrong.