buffalo_bill Posted February 25, 2009 Report Share Posted February 25, 2009 The matter has been discussed in Lusty's thread already . Instead of calling it money it would be better to use the term 'value ' because people tend to think money is something that is stacked somewhere . The example with playing poker sounds appropriate but cannot be used to explain the financial phantasies over the last years . These followed logic structures with results properly calculated and were as such no gambling . What went wrong is that people suddenly stopped believing that there were values . In the end it is another fallout of the Bush gang of geniuses by listening to Greenspan with his cheap money after Volcker was slaughtered because he insisted on regulating the financial industry . As the EC-governments did except UK amd Ireland , but they were called arseholes at that time . Link to comment Share on other sites More sharing options...
kamui Posted February 25, 2009 Report Share Posted February 25, 2009 The example with playing poker sounds appropriate but cannot be used to explain the financial phantasies over the last years . [color:red]These followed logic structures with results properly calculated[/color] and were as such no gambling . What went wrong is that people suddenly stopped believing that there were values . Wired Magazine has a very interesting article about the mathematical formula which was used to calculate all the risks involved to _create, appraise and sell_ all these extremely complex and toxic financial products: Recipe for Disaster: The Formula That Killed Wall Street As I understood the article, it was a billion dollar gamble, because the players did not understand that actually the formula did not reflect the real world, but that the formula was the basis of a virtual house of cards. PS: Today I just spoke with a retired banker, who told me that the banks he was working with frequently offered him these stuff (certificates e.g.), but that he did not buy any, since he said that he did not understand the products... Link to comment Share on other sites More sharing options...
WorldFun Posted February 26, 2009 Report Share Posted February 26, 2009 so this is really *it* isn't it? sounds plausible enough to me truly amazing & horrible (for all affected which I guess is many of us) will *finance* ever be 'fixed' properly or will we just wait for the next magic formula to bring us prosperity for the next 10 odd years? Link to comment Share on other sites More sharing options...
buffalo_bill Posted February 26, 2009 Report Share Posted February 26, 2009 After the accident has happened you usually won't have any difficulties to find lots of wise men who have been able to predict it exactly though did nod find the time to do it . Unfortunately . My neighbour is vice of a conservative well known German bank , he did also buy these papers though the renumeration of this bank's managers is only to a fraction based on bonuses . He felt sure that he did the best for his company , the credit default swaps for example were a good idea as such . If your man says he is a banker but did not understand the structure of these papers he should have quit his job . Link to comment Share on other sites More sharing options...
HeartThais Posted February 26, 2009 Report Share Posted February 26, 2009 The Wired article has a lot of inaccuracies and outright absurd statements. Calling gaussian copulas a "pricing formula" is like calling the Bell Curve an option pricing formula. There has been a lot of research over the decades of modeling the uncertainty of the markets. The problem will always be that you can't model the uncertain unless the parameters are contained and well-defined like dice or cards. Not a single quant I know (and I know hundreds) would ever confuse a model with reality. However, a lot of non-quant people do confuse models with reality. Link to comment Share on other sites More sharing options...
ThaiHome Posted February 26, 2009 Report Share Posted February 26, 2009 One of the interviews they had on the CNBC show I talked about earlier was with one your â??qunatsâ?Â, he said that some of the models used to support the subprime CDOâ??s had housing prices escalating at 6-8% per year forever . To me, who only works with very simple models, that only confirms what I know in that a model can tell you whatever you want if you understand it and manipulate the inputs to get out the answer you are looking for. All you do then is just list your assumptions in the small print and you are golden. :hubba: TH Link to comment Share on other sites More sharing options...
buffalo_bill Posted February 26, 2009 Report Share Posted February 26, 2009 Agreed . And if you have a rating agency that supports your good work by a couple of AAA's you are through the worst . Still what they have done was a logic business concept , otherwise it would be easy to jail them all for embezzlement . Link to comment Share on other sites More sharing options...
HeartThais Posted February 26, 2009 Report Share Posted February 26, 2009 One of the interviews they had on the CNBC show I talked about earlier was with one your â??qunatsâ?Â, he said that some of the models used to support the subprime CDOâ??s had housing prices escalating at 6-8% per year forever . There is a lot of sensational stuff going around about the quant models. They are an easy target because few people understand them and it is also satisfying to laugh at nerds who aren't as smart as they think they are. Regarding the 6-8% forever. Let me give you an example. If you were going to build a model for predicting the Dow Jones level 10 years from now, the standard approach is to model with a "drift" + a random element (typically brownian motion, a normally distributed random variable). If you assume the drift is 8%, you are technically assuming the Dow Jones will increase at 8% forever but that doesn't mean you think it will increase 8% every year because of the random element. You probably wouldn't use the model to estimate the Dow Jones 100 years from now either. My point isn't the stochastic calculus behind models but that it is really easy for non-math types to take a concept so out of context that it becomes ridiculous. phds in math are REALLY smart people. http://www.forbes.com/2008/10/07/securities-quants-models-oped-cx_ss_1008shreve.html Link to comment Share on other sites More sharing options...
ThaiHome Posted February 26, 2009 Report Share Posted February 26, 2009 Ithink you made my point which is if you understand the model and the people that made these models are very smart people, you can make it say whatever you want and the more complex it is and if it successfully predictes the performancen, which these did, then normal people start to trust them and do not question the iputs TH Link to comment Share on other sites More sharing options...
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