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I agree that customers generally get worse pricing on more complex products, but I don't think this is necessarily bad for the customer. To use a simple example

by vostok 9y ago

I agree that customers generally get worse pricing on more complex products, but I don't think this is necessarily bad for the customer. To use a simple example, the market for on the run treasuries is much more liquid than the market for off the run. If I need to take an old long bond off my books that has 10 years left until maturity then it might better to just sell it instead of going short the on the run 10 year even though the on the run has better pricing. Dealers are just better equipped to handle the complexity so the higher profit margin on more complex products doesn't necessarily lead to a worse result for the customer.

maxxxxx 9y ago
I think the complaint of the article is that complex products are being sold to customers who don't understand them. You certainly can witness that with municipalities that are close to going bankrupt because they bought instruments that backfired on them. The while financial crisis of 2008 was pretty much about people buying things where they couldn't assess the risks.
- vostok 9y ago
  > You certainly can witness that with municipalities that are close to going bankrupt because they bought instruments that backfired on them. That seems to be a story about corrupt hiring practices at municipalities. Maybe they should look into hiring the kid with the foreign name and funny accent instead of their high school buddy's kid. I'm sure they got screwed on all sorts of construction contracts too.
  - maxxxxx 9y ago
    Maybe the bankers could stop selling things to people that don't understand them?
    - vostok 9y ago
      First, I don't see how they (arguably more like a trader or a sales person than a banker) can possibly determine whether or not you understand the product. You don't generally expect car sales people to determine whether or not you really need a Ferrari or if a Toyota will do. Second, we all buy financial products that we don't understand and we generally benefit from them. Many people use fixed rate mortgages to buy homes and index funds to invest. I'd argue that they probably don't understand those products as they're relatively complex underneath the surface. This isn't financial advice, but I'd argue that they do benefit from using them.
      - uiri 9y ago
        Neither fixed rate mortgages nor index funds are particularly complex. The idea behind an index fund is that it invests in the components of an index. Generally, that is a specific basket of stocks or bonds. Stocks are perhaps the most straightforward financial instrument: pieces of ownership of a company. Bonds are a bit more complex, but they're just the right to repayment of a loan (principal plus interest). Complexity arises if the fund can't directly invest in the components of the index and most replicate it with other things instead but that's an implementation detail and an individual is perfectly capable of buying the individual components themselves if they're worried about that. A fixed rate mortgage is a loan with a fixed, compounding interest rate and a fixed term. The mortgage payment is determined based on an amortization schedule but that's an implementation detail - it could just as easily be monthly interest plus a fixed portion of the principal or something else.
        vostok 9y ago
        By your standards, MBS are also not particularly complex. They're not that different from pools of mortgages. In fact they have a lot of similarities with index funds and tranches are similar to options on the index. The complexity is precisely in the details. How much is the pre-payment option on your fixed rate mortgage worth? How much is the embedded interest rate swap that differentiates a fixed rate mortgage from a floating rate mortgage worth?
    - WJW 9y ago
      They could, but not everyone that wants them understands that they do not understand them.
- WalterBright 9y ago
  People don't understand how cars work, but that doesn't stop them from buying them and benefiting. Occasionally, not understanding cars gets people in trouble. In fact, very few of the things we deal with every day are generally understood - like the computer you're reading this on.
  - maxxxxx 9y ago
    People have a very good understanding of a car's risks. Same for computers.
    - tedunangst 9y ago
      That's a very questionable assertion.
      - meesterdude 9y ago
        uh - no its not. It's near common sense the things that can go wrong with owning and operating a car. that doesn't help people mitigate the risks themselves, but they are so prevalent you need to take a test that covers them before you can get a license to operate one.
  - sah2ed 9y ago
    Cars and certain investment products are complex, yes but that's where the similarity ends. People don't generally buy cars with the expectation of a return like is typical for investments. The article was complaining about how complexity can impede sussing out how much risk a sufficiently informed investor might be exposed to from owning a complex security, this is a different kind of risk from not being sufficiently informed while actively using a complex product (like your car example).

by vostok 9y ago

maxxxxx 9y ago

I think the complaint of the article is that complex products are being sold to customers who don't understand them. You certainly can witness that with municipalities that are close to going bankrupt because they bought instruments that backfired on them. The while financial crisis of 2008 was pretty much about people buying things where they couldn't assess the risks.

vostok 9y ago
> You certainly can witness that with municipalities that are close to going bankrupt because they bought instruments that backfired on them. That seems to be a story about corrupt hiring practices at municipalities. Maybe they should look into hiring the kid with the foreign name and funny accent instead of their high school buddy's kid. I'm sure they got screwed on all sorts of construction contracts too.
- maxxxxx 9y ago
  Maybe the bankers could stop selling things to people that don't understand them?
  - vostok 9y ago
    First, I don't see how they (arguably more like a trader or a sales person than a banker) can possibly determine whether or not you understand the product. You don't generally expect car sales people to determine whether or not you really need a Ferrari or if a Toyota will do. Second, we all buy financial products that we don't understand and we generally benefit from them. Many people use fixed rate mortgages to buy homes and index funds to invest. I'd argue that they probably don't understand those products as they're relatively complex underneath the surface. This isn't financial advice, but I'd argue that they do benefit from using them.
    - uiri 9y ago
      Neither fixed rate mortgages nor index funds are particularly complex. The idea behind an index fund is that it invests in the components of an index. Generally, that is a specific basket of stocks or bonds. Stocks are perhaps the most straightforward financial instrument: pieces of ownership of a company. Bonds are a bit more complex, but they're just the right to repayment of a loan (principal plus interest). Complexity arises if the fund can't directly invest in the components of the index and most replicate it with other things instead but that's an implementation detail and an individual is perfectly capable of buying the individual components themselves if they're worried about that. A fixed rate mortgage is a loan with a fixed, compounding interest rate and a fixed term. The mortgage payment is determined based on an amortization schedule but that's an implementation detail - it could just as easily be monthly interest plus a fixed portion of the principal or something else.
      - vostok 9y ago
        By your standards, MBS are also not particularly complex. They're not that different from pools of mortgages. In fact they have a lot of similarities with index funds and tranches are similar to options on the index. The complexity is precisely in the details. How much is the pre-payment option on your fixed rate mortgage worth? How much is the embedded interest rate swap that differentiates a fixed rate mortgage from a floating rate mortgage worth?
  - WJW 9y ago
    They could, but not everyone that wants them understands that they do not understand them.
WalterBright 9y ago
People don't understand how cars work, but that doesn't stop them from buying them and benefiting. Occasionally, not understanding cars gets people in trouble. In fact, very few of the things we deal with every day are generally understood - like the computer you're reading this on.
- maxxxxx 9y ago
  People have a very good understanding of a car's risks. Same for computers.
  - tedunangst 9y ago
    That's a very questionable assertion.
    - meesterdude 9y ago
      uh - no its not. It's near common sense the things that can go wrong with owning and operating a car. that doesn't help people mitigate the risks themselves, but they are so prevalent you need to take a test that covers them before you can get a license to operate one.
- sah2ed 9y ago
  Cars and certain investment products are complex, yes but that's where the similarity ends. People don't generally buy cars with the expectation of a return like is typical for investments. The article was complaining about how complexity can impede sussing out how much risk a sufficiently informed investor might be exposed to from owning a complex security, this is a different kind of risk from not being sufficiently informed while actively using a complex product (like your car example).