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Naive finance works that way. Sophisticated finance prices-in downside risk.
by Zigurd 5y ago
Naive finance works that way. Sophisticated finance prices-in downside risk.
- nradov 5y agoSure that's the theory. But how do you accurately price in risk for rare events? The uncertainty is so large that any price you set is effectively just a guess.
- krageon 5y agoYou guess based on data and do your best, that is more or less how all expert opinion works. An actuarial table also doesn't tell you anything about what will happen, but it allows you to do your best.
- Zigurd 5y agoInsurance and derivatives are supposed to find prices for rare events. And if an organization can't insure or securitize a risk it should make them think real hard about mitigation.
- toss1 5y agoYes, but with finance based on transitory MBA executive suites job-hopping around the corporate world, the right play is to price in the risk during your term and a bit after, so the 10-year risk is ignored, but if you can strip everything out of redundancy, product development, etc., the numbers will look better for a while, you get your bonus package, and move to the next opportunity/victim. When things have been built to last, there is a lot of "fat" that can be cut - for a while. The numbers will always look better - until they don't. When the music stops, the "lean" "financial engineers" will be long gone, and those still there will have not the slightest clue how to re-start a culture of serious product/service development or robust operations, and the corp falls into a death spiral. If you are a trader, you DGAF. If you are an investor, watch for numbers improving without product and operations improving, and new markets being opened.
- Zigurd 5y agoI was not disagreeing. The biggest problems come where finance is not sophisticated and management is seduced by cost cutting. Those often go hand in hand.