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Enhancing the
Black-Scholes-Merton Model with Macro Behavioral
Modeling Using Organic Chemistry Structures
by
Dallas F. Bell, Jr.
(This modeling and
simulation paper was accepted for presentation at the MODSIM World 2014
conference April 15-17 at Hampton, Virginia.)
Abstract: Financial engineering is a field of
financial theory that employs the multidisciplinary tools and methods of
mathematics and engineering. Its
practitioners have developed the Black-Scholes-Merton model, often criticized
as being too materialistic. Organic
chemistry is concerned with molecules that compose material life. This largely involves the structure and
behavior of the atoms that form the molecules plants and animals require for
life. With an understanding of what
it means to be human, systematic political science is concerned with both the
material and non-material components and structures of individual and societal
behaviors. These core elements are
structured into macro models similar to the micro models used in organic
chemistry. Societies are complex
and these models balanced with material and non-material input are intended to
be sufficient enough to map and predict individual and societal behaviors for
both experienced analysts and newly exposed students in anthropocentric fields,
such as financial engineering.
Keywords:
financial engineering, Black-Scholes-Merton, organic chemistry, behavioral
modeling.
Financial engineering is a field of financial theory that
employs the multidisciplinary tools and methods of mathematics, physics, and
engineering. The practitioners of
this area of study, quant, have developed the Black-Scholes-Merton model named
for Fischer Black, Myron Scholes, and Robert Merton.[1] This mathematical model of financial
markets with derivative investment instruments provides a theoretical estimate
of the price of European-style options.
The process' focus on only material aspects[2] of
expected human behavior has led to criticisms of adherents as having too narrow
a scope.[3]
Inorganic chemistry is concerned with the material
properties and reactions of inorganic compounds, such as minerals (salt etc.),
metals and alloys (iron etc.), non-metallic elements and compounds (silicon
etc.), and metal complexes. This
area of study includes all chemical compounds except those based on rings or
chains of carbon atoms. That branch
of chemistry is known as organic chemistry.[4] It is concerned with molecules that
compose material life. This largely
involves the structure and behavior of the atoms of carbon, hydrogen, oxygen,
nitrogen, and a few others that form the molecules plants and animals require
for life. Organic chemists
synthesize new molecules in hope of developing new more efficient reactions
often found in drugs, flavorings, fragrances, plastics, fertilizers, and
pesticides, etc.[5] Psychoactive
drug structures can also be examined on how they act on brain transmitters and
receptors, such as alcohol, nicotine, caffeine, cocaine, etc.
A common organic molecule is the aromatic compound of
benzene. It is a hexagon ring
of 6 carbon and 6 hydrogen atoms (C6H6)
shown in its model below.[6]
That benzene model can be expanded
into a model for vanillin (C8H8O3) seen
below.
Like benzene, cyclooctatetraene is aromatic but its ring is an octagon
(C8H8) shown below.
At this point we must ask what it means to be human. It is usually agreed that human DNA
biological (material) matter is combined with varying levels of (non-material)
intellect. That intellect causes
questions[7] to
be asked, things tested for understanding, and things applied, such as love,[8]
justice,[9]
and mercy[10] etc.,
for the human being standard of completeness or wholeness called holiness. The historical state of most of mankind
is the low standard of incompleteness or unholiness. Malcolm Muggeridge (1903-1990) is quoted
as saying "The depravity of man is at once the most empirically verifiable reality but at the
same time the most intellectually resisted fact."[11]
In time, the ultimate question arises from concepts of past,
present, and future, especially life after death, and what was and is the
Causer of all effects.[12] It is reasoned that an ordered creation
had a Creator with purpose working with love, justice, and mercy
etc.—intellect. An attribute
of pre-existing material creation is infinite non-material existence. This Being would be the transcendent
source of all that exists, which includes truth. Thus, understanding human behavior must
begin with understanding adherents to theological (non-material) and
cosmological (material) beliefs.
Systematic political science[13]
is concerned with both the material and non-material components and structures
of individual and societal behaviors.
There are identified elements that form those systems.[14] These core elements can be structured
into macro models similar to the micro models used in organic chemistry. There are generally First World (having
the most holy standard for behavior and so is the most rare cycle), Second
World (having a moderate standard of holy behavioral compliance and is somewhat
common), and Third World (having the least survival low standard for holy
behavior and is the most common cycle) societal systems that rise and fall
based on the behaviors of their citizenry.[15] The individual behaviors are based on
non-material core beliefs that provide the purpose for material collective
behavior within formations of institutions. Therefore, there would be three macro
models with varying deviations of their internal components. These octagon models can be seen below
and their online app can be found at http://SystematicPoliticalScience.com/slides.html.
The generic explanations of the symbols composing the
structures are as follows.
T: the non-material source of authority
finite humans use to process and interpolate gaps in understanding from
infinite transcendence to the finite.
R: the application of the transcendent authority to determine
what is good and what is evil, such as the holiness boundaries associated with
the potential to steal, to lie, to murder, etc.
B: the material levels of individual behavior from survival to
self-actualization bounded by material neurological abilities and environment,[16]
and applications of non-material good and evil with the standards of love,
justice, mercy, etc.
Fa: the institution of family is formed.
Ch: individuals and families form the institution of church to
reinforce their core beliefs.
Ed: families and churches formalize the institution of
educations to pass on desired knowledge and understanding.
Hosp: churches organize the hospital resources for caring for
the sick.
Orph: churches organize the orphanage resources for caring for
dependent children without parents and relatives.
Bu: business is the necessary exchange of products and labor.
Gov: governments are formed for security and efficiency and are
made up of the executive, legislative, and judicial branches.
Ex: the executive branch of government is responsible for
running agencies and headed by the chief executive.
Mil: the military is run by the chief executive known as
president or prime minister, etc.
Leg: the legislature is made up of elected officials for
regions that represent their interests and compose punitive laws from what is
considered good and evil and societal laws for coordination of individuals and
government, such as those regarding infrastructure.
Infr: infrastructure of roads and bridges, etc. is provided for
by the legislature.
Ju: the judicial branch is the system of courts to handle
policing, trials and punishments for violations of law from the legislature.
Pol: the police force is responsible for preventing and
stopping domestic violations of legislative laws.
W: world systems reflect a First, Second, or Third World
cycle. They reflect the levels of
collective individual behavior from
survival to the highest possible level of self-actualization allowed by the
efficiency of the system.
E: the future of individuals and the society can range from
eternal after death beliefs to no beliefs which are
based on the beginning beliefs for authority of what is good and evil.
As the models indicate, the presented elements vary in type
and relationship to other elements according to the respective type of societal
system[17]
based on individual beliefs. The
accuracy of the models have been proven by the United Nations' desire to create
an unholy Third World global government[18]
and the former Soviet Unions' unholy Third World communist goals[19] which
are predictably denied by the unholy depraved. Societies are complex and these models balanced
with material and non-material input are intended to be sufficient enough to
map and predict individual and societal behaviors for both experienced analysts
and newly exposed students in anthropocentric fields.
[1] Black,
Scholes, and Merton were each recognized in 1997 by the Nobel Prize committee
on economics.
[2] If
science only involved material reality, universities would need to eliminate
the departments of philosophy, linguistics, literature, arts, etc.
[3] Those
critical of over reliance on this process include Ian Stewart, emeritus professor of
mathematics at the University of Warwick, Emanuel Derman, author on
financial engineering and professor in the department of industrial engineering
at Columbia University, Nassim Taleb, author of The Black Swan and professor of financial engineering at the
Polytechnic Institute of New York University, and Paul Volker, former chairman
of the Federal Reserve.
[4] In 1828,
Friedrich Woehler accidently evaporated an aqueous solution of ammonium cyanate
(NH4OCN). That synthesis
of the organic biological compound urea is generally agreed to have began the
sub-discipline of organic chemistry.
[5] An
online organic chemistry textbook can be found at
www2.chemistry.msu.edu/faculty/reusch/virttxtjml/intro1.htm
The Organic Chemistry (Third Edition) dictionary by
Marye Anne Fox and James K. Whitesell is at
http://physicalscience.jbpub.com/orgo/glossary.cfm
[6] Software
for drawing chemical structures can be found at
www.acdlabs.com/resources/freeware/chemsketch/
[7] The
Stoic Lucius Annaeus Seneca's (c. 1
B.C. – 65 A.D.) writing titled Natural
Questions says nature has given mankind mirrors so that he may know himself
(ut homo ipse se nosset).
http://plato.stanford.edu/entries/seneca/
The Anthropic Principle is an observation that implies
the universe must have intellect to observe, question, understand, and utilize
its constants, such as those found in physics (Job 12:7-10; Ps. 19:1-3,
104:1-35; Is. 45:12-19; Matt. 6:26-30; John 1:1-5: Acts 14:17). Man's fragile state is seen in the lines uttered by Prospero, in Act IV,
Scene I, of William Shakespeare's play The Tempest, "We are such stuff as dreams are made on."
[8]
Augustine's (354-430) Homily 7 on the First Epistle of St. John notes that man
was born to love and be loved (I John 4:4-12).
[9] Albert
Camus (1919-1960) wrote The Rebel which warned against a world
of executioners and their victims and how frustration with
justice leads to rebellion. Olivier
Todd's 2000 book titled Albert Camus: a
Life explained Camus' observation of both the United States and the Soviet
Union's idolatry of technology for the human need for a hopeful future. The materialism seen
in the U.S. and former U.S.S.R. is elaborated on by Czeslaw Milosz
(1911-2004). His book The Captive Mind looks at enslavement through
consciousness. Claude Frdric
Bastiat (1801-1850) wrote in The Law
that societal law can not defend life, liberty, and
property, its sole purpose, if it promotes legalized plunder from one group to
give to another group.
[10] Seneca's essay On Mercy praised the goodness of the murderer Emperor Nero. He also wrote in Epistulae ad Lucilium that we are to expect from others what we did to them (ab alio expectes alteri quod feceris). Jesus' Sermon on the Mount (The
Beatitudes) praises the merciful saying the merciful will obtain mercy (Matt.
5:7). Moses wrote in the Torah to
not seek revenge or bear a grudge against one of your people, but love your
neighbor as yourself (Lev. 19:18).
Jesus taught that whatever we would that men should do to us, we should
do to them (Matt. 7:12; Luke 6:31) called The Golden Rule.
[11] In this
case, depravity is defined as the lowest of standards for holiness.
[12] This is
the God of the Bible, Yahweh.
[13] See the
paper by Dallas F. Bell Jr. titled How
Theology Dictates Political Systems: An Extract from the Deductive Unification
of Anthropocentric Knowledge presented in March 2002 in Memphis, Tennessee.
www.SystematicPoliticalScience.org/article.html
www.SystematicPoliticalScience.org/periodic.html
[14] See the
paper by Dallas F. Bell Jr. titled The
Primary and Secondary Precursors to Mathematical Formulations in Dynamic Games
presented at the New Economic Windows: Complexity Hints for Economic Policy
conference in September 2004 hosted by the Department of Economics and
Statistics at the University of Salerno, Italy.
http://SystematicPoliticalScience.com/precursors.html
[16] Marian
Diamond, University of California at Berkeley professor of anatomy and one of
the world's foremost neuroanatomists, has a written on neuroscience and the
environment, especially the work titled Response
of the Brain to Enrichment.
http://education.jhu.edu/PD/newhorizons/Neurosciences/articles/Response%20of%20the%20Brain%20to%20Enrichment/
[17] For
nation-state background data see
http://lcweb2.loc.gov/frd/cs/
For real time nation-state data see
www.cia.gov/library/publications/world-leaders-1/index.html
[18] George Brock
Chisholm (1896-1971) was the first United Nations Director-General of the World Health Organization in
office from 1948 to 1953. He is quoted
as saying "To achieve world government, it is necessary to remove from the
minds of men their individualism, loyalty to family traditions, national
patriotism, and religious dogmas." The resultant unholy behavior by hostis
humani generis (Latin
meaning enemies of the human race which Marcus Cicero, 106 B.C.-43 B.C., used
to defined pirates in Roman law) would predictably be a Third World global
system. This strategy acknowledges
the unchanging societal components of a core authority (T) of beliefs for what
is good and evil (R) and individual behaviors (B) that lead to institutions
(Fa, Ch, Bu, Gov) to form the governmental system (W), in this case 3W1.
[19] The 1958 book titled The Naked Communist by Cleon Skousen echoes the unholy goals of The
Soviet Union's Third World beliefs to destroy the holy First World national
beliefs of the U.S. They were read
into the Congressional record. A
few of their goals which have been implemented and greatly
incapacitating the U.S. are as follows. Promote the U.N. as the only hope for mankind. If
its charter is rewritten, demand that it be set up as a one-world government
with its own independent armed forces.
Do away with all loyalty oaths.
Capture one or both of the political parties in the United States. Use technical decisions of the courts to
weaken basic American institutions by claiming their activities violate civil
rights. Get control of the schools.
Use them as transmission belts for socialism and current Communist propaganda.
Soften the curriculum. Get control of teachers' associations. Put the party
line in textbooks. Use student riots to foment public
protests against programs or organizations which are
under Communist attack. Infiltrate the press. Get control of book-review
assignments, editorial writing, policymaking
positions. Gain control of key positions in radio, TV, and motion pictures.
Continue discrediting American culture by degrading all forms of artistic
expression. An American Communist cell was told to "eliminate all good sculpture
from parks and buildings, substitute shapeless, awkward and meaningless
forms." Control art critics and directors of art museums. Eliminate all
laws governing obscenity by calling them "censorship" and a violation
of free speech and free press. Break down cultural standards of morality by
promoting pornography and obscenity in books, magazines, motion pictures,
radio, and TV. Present homosexuality, degeneracy and promiscuity as
"normal, natural, healthy." Infiltrate the churches and replace
revealed religion with "social" religion. Discredit the Bible and
emphasize the need for intellectual maturity which
does not need a "religious crutch." Eliminate prayer or any phase of
religious expression in the schools on the ground that it violates the principle
of "separation of church and state." Discredit the American
Constitution by calling it inadequate, old-fashioned, out of step with modern
needs, a hindrance to cooperation between nations on a worldwide basis.
Discredit the American Founding Fathers. Present them as selfish aristocrats
who had no concern for the "common man." Belittle all forms of
American culture and discourage the teaching of American history on the ground
that it was only a minor part of the "big picture." Support any
socialist movement to give centralized control over any part of the
culture—education, social agencies, welfare programs, mental health
clinics, etc. Eliminate all laws or procedures which
interfere with the operation of the Communist apparatus. Eliminate the House
Committee on Un-American Activities. Discredit and eventually dismantle the
FBI. Infiltrate and gain control of more unions. Infiltrate and gain control of
big business. Transfer some of the powers of arrest from the police to social
agencies. Treat all behavioral problems as psychiatric disorders which no one
but psychiatrists can understand or treat. Dominate the psychiatric profession
and use mental health laws as a means of gaining coercive control over those
who oppose Communist goals. Discredit the family as an institution. Encourage
promiscuity, masturbation and easy divorce. Emphasize the need to raise
children away from the negative influence of parents. Attribute prejudices,
mental blocks and retarding of children to suppressive influence of parents. Create
the impression that violence and insurrection are legitimate aspects of the American
tradition; that students and special-interest groups should rise up and use
"united force" to solve economic, political or social problems.
Overthrow all colonial governments before native populations are ready for
self-government. Repeal the Connally reservation so the United States cannot
prevent the World Court from seizing jurisdiction over domestic problems. Give
the World Court jurisdiction over nations and individuals alike. Communist Goals (1963), Congressional Record--Appendix, pp.
A34-A35, Thursday, January 10, 1963, Current Communist Goals, EXTENSION OF REMARKS OF HON. A. S. HERLONG, JR. OF
FLORIDA IN THE HOUSE OF REPRESENTATIVES
The former Soviet Union acknowledged
that their unholy inefficient society could never defeat the holy efficient
U.S. society militarily by developing a strategy with U.S. liberals to attack
the U.S. core (T) beliefs away from the biblical God, Yahweh, for the standard
of good and evil (R) which would change their individual's behavior (B) so the
society's institutions (Fa, Ch, Bu. Gov) would be unholy inefficient like their
system (3W1) and collapse. In
addition to proving the models in this paper, this is ironic in that the
Soviets created U.S. global competition that is more prone to lying, stealing,
murdering, etc. They apparently
wanted to be treated with less love, less justice, less mercy, etc. by the U.S. It seems they realized they needed to
avoid punitive justice for lying, stealing, murder, etc. at the cost of loosing
love and mercy. Their unholiness
blinded their not acting in their long term
self-interest and increasing their impending self-destruction or todestrieb (German: meaning death
drive). Only the infinitely complete
holy Creator can have both power and love.
With His Holy Spirit there can be freedom (II Cor. 3:17). Francisco Suárez's (1548-1617) book
Disputationes Metaphysicae looks at the distinctions
between ens infinitum (Creator God) and
ens finitum (created beings).
It is said that the unjust are an abomination to the just as are
the upright an abomination to the wicked unjust (Prov. 29:27) and the wages of
unholiness (sin) is death (Rom. 6:23).
This does not mean that First World systems do not experience
self-initiated death. There is a
periodic pruning away of previous fruitful economic limbs that have been
rendered ineffective due to their replacement of more efficient and fruitful
economic limbs. For example, the
horse and buggy has been replaced by automobile transportation and newspapers
have been replaced by digital communications.
This produces short term redistribution of jobs
and wealth. Schöpferische zerstörung (German: meaning creative destruction) is called
Schumpeter's gale (named for Joseph Schumpeter, 1883-1950) and describes the
necessary occurrence in a society with individual and market freewill to
discover, invent and reinvent.
Second and Third World systems cripple this human advancement. In 1992, Peter Howitt and Philippe
Aghion published a paper in Econometrica
titled "A Model of Growth Through Creative Destruction" that formalized the
terms mathematically.
—ALL RIGHTS RESERVED
©2014 DALLAS F. BELL, JR—
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