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Link to piece: https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm... Taleb made a caree
by misiti3780 7y ago
Link to piece: https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...
Taleb made a career out of this: Economists use models that are don't consider fat-tails. The rating agencies used them, LTCM used them, Fannie and Freddie used them. Everyone thought spreading shitty risks across MBS, CDOs, CDS, CDS^2 mitigated the risk, but it turns out i did not.
As Taleb would say, the economists use models that assume we live in "mediocristan" but we live in "extremistan"
Krugman will probably write another article like this in 10-15 years, but instead of it being about housing debt, it will be about student loan debt.
- hcknwscommenter 7y ago"Everyone thought spreading shitty risks across MBS, CDOs, CDS, CDS^2 mitigated the risk, but it turns out i did not." I must quibble. Yes it is true that everyone thought spreading mitigated risk. In reality, it actually did mitigate the risk, just not to the extent expected by many. Indeed, a colleague of mine was desperately putting together a "recession" model for CDOs that included suitable co-variances lacking in the standard models (e.g., if foreclosure rates rise in an area past a certain threshold, house prices in general will be depressed ). There was no market for such a product because it introduced significant non-linearity in the valuation models. Nonetheless, clearly the folks at magnetar understood what was going on.
- misiti3780 7y agoi agree my statement is not correct. thanks!