They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere. Where had the risk gone?
They didn't know, or didn't ask.
So what I found kind of astounding here was the extent to which the widespread use of this expression actually prevented people from trying to assess risk at all. Far from not knowing how, the situation seems to have come about because, in a chicken-and-egg kind of way, everyone was basing their numbers on market prices which are based on the premise that someone else had run the numbers properly. So it's like playing the Nose Game with everyone's retirement savings, and watching a lot of bankers yell "NOT IT!" all at once.
But I mean, essentially we know how to do this, or anyway, experimentally we have only one sensible route: look at historical data on correlations. Which suppposedly doesn't exist. This is after all how Nate Silver gets such great predictions for his elections: he looks at how all the states varied together as far back as the world keeps records. Anyone who started collecting this kind of information could sell it at a very high price. Of course there is still the possibility that the world will do things you didn't predict because it's so strongly coupled. But not even making any kind of reasonable estimate has got to be a mistake.
hm
They didn't know, or didn't ask.
So what I found kind of astounding here was the extent to which the widespread use of this expression actually prevented people from trying to assess risk at all. Far from not knowing how, the situation seems to have come about because, in a chicken-and-egg kind of way, everyone was basing their numbers on market prices which are based on the premise that someone else had run the numbers properly. So it's like playing the Nose Game with everyone's retirement savings, and watching a lot of bankers yell "NOT IT!" all at once.
But I mean, essentially we know how to do this, or anyway, experimentally we have only one sensible route: look at historical data on correlations. Which suppposedly doesn't exist. This is after all how Nate Silver gets such great predictions for his elections: he looks at how all the states varied together as far back as the world keeps records. Anyone who started collecting this kind of information could sell it at a very high price. Of course there is still the possibility that the world will do things you didn't predict because it's so strongly coupled. But not even making any kind of reasonable estimate has got to be a mistake.