An Artist Was So Angry With Wall Street's Formula For Pricing Options, He Created This Brutal Exhibit

An art exhibit and book, both titled "Infinity is the Enemy", by artist t. Rutt, bring together Dadaist-inspired art and high finance to start a conversation about the nature and uses of infinity.

The motivation for the exhibit is the Black-Scholes-Merton model, which sits at the foundation of modern finance. The model provides one of the basic methods for estimating the correct price of financial instruments like options, and is used broadly in the financial markets. 

t. Rutt questions this foundation. His objection stems from the use of infinite time in the original papers that developed the theory of derivative pricing. In those original papers, the notion of a "perpetual warrant", or an options contract that would never expire and be redeemable at any time from now until infinity, was used as a limiting example. This leads to some counterintuitive results, and t. Rutt believes this use of infinite time is inappropriate and devastating to derivative pricing.

On the other end of the time spectrum, t. Rutt also has concerns about the ever-shrinking time intervals and push for speed in high frequency algorithmic trading. He presents this as time approaching 1/∞.

Toilet Seats

t. Rutt explores these troubling infinities through art inspired by the twentieth century artist Marcel Duchamp. Inspired by Duchamp's "Fountain" — a urinal signed "R. Mutt" (from which t. Rutt derived his name) — the show's central symbol is a toilet seat, positioned to resemble the infinity symbol, and with a representation of limits of time going to infinity and the reciprocal of infinity.

The exhibit includes an entire wall of similar toilet seats wrapped in stained military felt pouches. The pouches are adorned with name tags for various economists, financiers, and thinkers that in some way or another contributed to ideas of infinity or financial engineering.  Names include Robert Merton, George Soros, and Nassim Taleb.

These toilet seats are part of an interesting experiment in price discovery. The pieces are on sale for $70,000 each, and t. Rutt will immediately buy them back for $1,000. This sets up a market where eventually the true value of the pieces can be determined through a process of price discovery. As an extra twist, the thinkers whose names are attached to the seats can come in to the exhibit at any time and receive their named seat for free.

One of the main pieces in the exhibit is a collection of marble tablets on which excerpts from the foundational papers on derivatives pricing are printed. t. Rutt added his criticisms of the use of infinite time and the injection of concepts from physics into economics and finance onto the tablets.

The added comments point out some of the strange things that happen when the expiration date of certain types of derivative contracts extends out into infinity.

The Black-Scholes Model

The original Black-Scholes, Merton, and Samuelson papers were attempting to find a way to determine the value of a warrant — a contract in which the buyer has the option, after an agreed upon amount of time has passed, to buy some shares of an underlying corporate stock at a price fixed at the time the contract is signed. If the stock price is higher on the expiration date, the contract holder can buy the stock at the lower price and pocket the difference. If the stock price is lower, the holder can just walk away, only losing the initial amount they paid for the contract.

The Black-Scholes-Merton model gives a way to find the current value of such a contract in terms of some variables pertaining to the underlying stock. The model, and related models like it developed for other types of derivative contracts, are essential to valuing the enormous quantities of derivatives in the financial system.

In the original papers, odd things start to happen when the expiration date goes further and further out. When taken to the ultimate limit of infinity — a contract that never expires — the model predicts that the value of a warrant should equal the value of the underlying stock. This has some strange implications, and these implications are at the heart of t. Rutt's project.

These tablets can also be viewed on the exhibit and book's website.

Tesla

In another set of pieces, titled "Bad Physics on Good Physics", the Black-Scholes formulas — the equations that are actually used in modeling derivative prices — are painted on the hoods of Tesla cars adorned with the national flags of countries with active derivative markets. t. Rutt describes the piece as "represent[ing] how Tesla uses good physics to solve a large problem in the physical world and contrasts that with the flawed use of physics by Wall Street executives and the resulting instability that hyper-complexity has created in the global financial system".

He has also created a series of vinyl coverings for Tesla cars around the same theme.

Other pieces in the exhibit explore aspects of infinity from a spiritual and meditative angle, contrasting personal experiences of the infinite to the insertion of infinite time in finance.

To see the exhibit, or for more information about the art and the book, call Mary Mihelic at 917-969-0222, or visit the website at infinityistheenemy.com.  You can see his New York exhibtion by appointment at Brush on 9 E. 19th St.