Sophisticated vulgarity



People who haven't lived and died by financial models often have difficulty understanding how they are used. In physics or engineering, a theory predicts future values. In finance, you're lucky if your model can predict the future sign correctly. So, what's the point?

Let's look at a straightforward financial problem: estimate the price of a seven-room Park Avenue duplex from the known price of a two-room Battery Park City apartment. Here's a simple model: figure out the implied price per squ