5 ms·

Aside from the problem of outright extortion, even the savviest financiers can underestimate low-probability risks (as the recent mortgage debacle shows). You

by sethg 16y ago

Aside from the problem of outright extortion, even the savviest financiers can underestimate low-probability risks (as the recent mortgage debacle shows). You would have cycles of price wars among insurers trying to attract customers by lowering premiums, until one larger-than-expected crime wave (or even a hiccup in the bond market) leaving major issuers unable to pay out their claims.

joe_the_user 16y ago
Aside from the problem of outright extortion, even the savviest financiers can underestimate low-probability risks (as the recent mortgage debacle shows). While savvy investors may indeed underestimate low-probability risks, I take issue with any claim the mortgage bubble showed this. The sad end of that bubble was an extremely high probability event. The main thing the debacle showed was the willingness of many people to believe fallacious arguments which made reference to claims about low probability events. Even there, the willingness of investors to believe that standard "this time it's different" line has been shown over and over again.
- stretchwithme 16y ago
  Yeah. Actually, the savviest investors were the ones betting that the bubble would pop. Of course, the majority thinks otherwise or there would have been no bubble. Savvy in this case was simply looking at the facts and not letting popular opinion keep you from acting. And, for some, having friends in the government to bail out the fools who bet on the bubble growing forever so you can get paid.
OstiaAntica 16y ago
The "underestimation" of mortgage risk was deliberate, the bankers were motivated by short-term bonus payouts.
wisty 16y ago
That's hard to say. People are often really scared by things like climate change (uncertain, huge impact), and less scared of everyday disasters. http://www.schneier.com/blog/archives/2009/11/fear_and_overre.html http://www.schneier.com/blog/archives/2009/11/fear_and_overr... Or table here: http://www.schneier.com/essay-170.html http://www.schneier.com/essay-170.html

by sethg 16y ago

joe_the_user 16y ago

Aside from the problem of outright extortion, even the savviest financiers can underestimate low-probability risks (as the recent mortgage debacle shows). While savvy investors may indeed underestimate low-probability risks, I take issue with any claim the mortgage bubble showed this. The sad end of that bubble was an extremely high probability event. The main thing the debacle showed was the willingness of many people to believe fallacious arguments which made reference to claims about low probability events. Even there, the willingness of investors to believe that standard "this time it's different" line has been shown over and over again.

stretchwithme 16y ago
Yeah. Actually, the savviest investors were the ones betting that the bubble would pop. Of course, the majority thinks otherwise or there would have been no bubble. Savvy in this case was simply looking at the facts and not letting popular opinion keep you from acting. And, for some, having friends in the government to bail out the fools who bet on the bubble growing forever so you can get paid.

OstiaAntica 16y ago

The "underestimation" of mortgage risk was deliberate, the bankers were motivated by short-term bonus payouts.

wisty 16y ago

That's hard to say. People are often really scared by things like climate change (uncertain, huge impact), and less scared of everyday disasters. http://www.schneier.com/blog/archives/2009/11/fear_and_overre.html http://www.schneier.com/blog/archives/2009/11/fear_and_overr... Or table here: http://www.schneier.com/essay-170.html http://www.schneier.com/essay-170.html