How Wall Street quants lied to their computers
Now that some of the vague-but-panicked headlines have started to pass, we’re starting to learn what happened in the trenches to allow the market to go whacky. I’m not a huge math fan, being not-so-great at it, but I appreciate a good analysis, and this is a good analysis of one aspect of the mortgage problem.
September 29th, 2008 at 6:08 pm
Wait, you mean that the dudes in charge of these big companies even lied to themselves (essentially) to make more money? Shocking. (ha!)
Okay, okay, it’s more like “depressing, but not unexpected.” but still.
September 29th, 2008 at 6:51 pm
I think there were a lot of people — from the lowly homebuyer whose income didn’t technically meet the requirements for the house they wanted to buy, to the high-level exec at the top of some of these companies — who believed the bubble was never going to burst. And if the bubble never bursts, well, how can you be at risk?
We were offered an adjustable rate mortgage as an option when we were shopping, and the rate was ridiculously low, but had we taken it the rate would be insanely high now. It sounded too good to be true, and a lot of people are quite willing to buy “too good to be true” anyway. We weren’t. That’s not to say we’re better or worse than the ones who did. It just happens that the bubble did burst and we turned out to be the smart ones. If the bubble had never burst (somehow), then we’d be the ones “overpaying” all these years instead.
Multiply that by millions of people making millions of decisions, and, well, the market goes a little wonky.
September 30th, 2008 at 11:58 am
The feedback loop got too long. And as John Maynard Keynes said, “The market can stay irrational longer than you can stay solvent” - there’s a terrific incentive to ignore your better knowledge and forge on ahead.
September 30th, 2008 at 12:03 pm
Very true - that’s a good article too.