@chukwukaosakwe
In hindsight, the hubris is absolutely astounding. Anybody who knows almost anything about the world of financial markets knows that they are anything but a utopia of perfect prices and rational investors. Irrationality reigns supreme there. But notice something, Merton knew this, at least on some level. Lowenstein writes that he “blithely ignored the times when their (the market actors’) emotions ran riot.”
Reality gave Merton several chances to learn, and he refused to. When Merton’s equations collided with reality, they did not hold up; they did not work as they were supposed to, because markets are not ideal and traders are not automatons. https://thechukwukaosakwe.wordpress.com/2025/11/24/colliding-with-reality/