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This question is motivated by my experience of meeting some markets professionals who claimed certain things about Black Scholes and option pricing.

So I am wondering what are some of the common misconceptions within Quantitative Finance that people have encountered?

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Paul Wilmott wrote a book that addresses the subject pretty well. A solid read. The Money Formula

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  • $\begingroup$ Agree, valuable read! $\endgroup$
    – vonjd
    Jul 25, 2017 at 8:11
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  1. Black-Scholes: One of the biggest misconceptions is that the general BSM-Formula is a "law of nature". People sometimes forget the word "model". That's why in the field of finance there is an enormous amount of other models, which try to make option-pricing as realistic as possible (stochastic volatility, jump-processes etc.)

  2. Continuous time: How do u define "continuous time"? This is a highly theoretical construct. So can the markets be described as "continuous"? Indeed they are actually discrete. This misconception is also related to the first Topic.

  3. Probability theory: Some scientists argue that our probability theory is still just a theory and not a natural law. Indeed, there are a few more other probability theories which we forgot. For more details I can recommend the book "The Black Swan" from Taleb.

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  • $\begingroup$ What do you mean by '"other probability theories"? Taleb is just arguing that the distribution of returns in financial markets has much fatter tails than the normal distribution. But he is still well within the realms of classical probability theory (and it is hard to imagine any other way). $\endgroup$
    – vonjd
    Jul 21, 2017 at 12:58

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