[supster]

LTCM's main money strategies were fixed income arbitrage based on the difference between on the run and off the run Tbills as well as Merger Arbitrage. Black-Scholes model was not involved in their investing in a significant amount. Business was good until they were too successful (funds copying strategy thus diminishing returns and their capital base grew 8 fold thus harder to deploy capital). Eventually though it was the Russian debt crisis that blew them up, not mismanagement.

[scurvy]

Black-Scholes heavily influenced their model. Read the book. Talk with people who were involved. You'll see how firmly they believed in their incorrect formulas and algorithms. Even up to the morning that they were insolvent, they were trying to raise money and double down on their bets. They absolutely failed at running a business. They had a bad idea and let it run wild rather than calling it quits early on. You can blame it on the Russian or Asian debt crises all you want, but they were going to get hit hard sooner or later. When the fecal matter hits the fan, the correlation of everything goes to 1. If you can't grasp that, you haven't learned the LTCM lesson and no equation or formula will save you.

That said, this post is about people in the Valley making big bets. Not finance people thinking that they can build a better mouse trap for 12 basis points.