I don't really see that the use of the expression _prevented_ anyone from trying to assess risk; it just made people think that they didn't really _need_ to.
This, and your (3) above, is what I was getting at. It "prevented" them in the sense that it made them feel as though independent risk assessment was unnecessary, so they didn't do it. But one of the implicit assumptions of the model is that the market prices are a fair indicator of the risk. Unless someone in the economy has actually based the market value of a commodity of some kind off of historical measurements, the price is based entirely on smoke and mirrors (other people's perceptions of value) and becomes decoupled from reality. It seems kind of related to the "tragedy of the commons" in this way: the responsibility for doing something of crucial value to society is shifted to someone else, but since nobody else has volunteered nobody actually does it.
In the case of something like art or designer clothing, perceptions may be an accurate measure of the value; less so where e.g. historical authenticity is important. But in the case of a bet on the outcome of some event which has an objective state that can be measured, like whether people in a particular community or income bracket do or don't have enough money to pay their mortgages, well...
There are all kinds of other caveats, obviously, when someone tries to do things more rigorously. And maybe the point is that the sub-tranching and meta-tranching of these derivatives makes it much harder to do a rigorous job, and then when you make bets on what happens within this tightly coupled system you're likely to get the wrong answer. That may also be. But part of what I got from this article is that the quants took this thing as carte blanche to not even try, and moreover as carte blanche to create infinitely more complex things than could ever possibly be priced in a more traditional way -- because the risk assessment in the model was based on everyone else's perceptions of risk, rather than on any reasonable empirical calculation of the risk.
And that, if true, seems to me a clear dereliction of duty by the financial sector and grounds for tarring and feathering them all.
![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
branchandroot
Re: insert subject header here
Date: 25 February 2009 18:08 (UTC)This, and your (3) above, is what I was getting at. It "prevented" them in the sense that it made them feel as though independent risk assessment was unnecessary, so they didn't do it. But one of the implicit assumptions of the model is that the market prices are a fair indicator of the risk. Unless someone in the economy has actually based the market value of a commodity of some kind off of historical measurements, the price is based entirely on smoke and mirrors (other people's perceptions of value) and becomes decoupled from reality. It seems kind of related to the "tragedy of the commons" in this way: the responsibility for doing something of crucial value to society is shifted to someone else, but since nobody else has volunteered nobody actually does it.
In the case of something like art or designer clothing, perceptions may be an accurate measure of the value; less so where e.g. historical authenticity is important. But in the case of a bet on the outcome of some event which has an objective state that can be measured, like whether people in a particular community or income bracket do or don't have enough money to pay their mortgages, well...
There are all kinds of other caveats, obviously, when someone tries to do things more rigorously. And maybe the point is that the sub-tranching and meta-tranching of these derivatives makes it much harder to do a rigorous job, and then when you make bets on what happens within this tightly coupled system you're likely to get the wrong answer. That may also be. But part of what I got from this article is that the quants took this thing as carte blanche to not even try, and moreover as carte blanche to create infinitely more complex things than could ever possibly be priced in a more traditional way -- because the risk assessment in the model was based on everyone else's perceptions of risk, rather than on any reasonable empirical calculation of the risk.
And that, if true, seems to me a clear dereliction of duty by the financial sector and grounds for tarring and feathering them all.