3 ms·
Explanation fail. This works perfectly well so long as you know how diseased the cows are, and the odds of any one cow dying are independent from the next. It
by Eliezer 18y ago
Explanation fail. This works perfectly well so long as you know how diseased the cows are, and the odds of any one cow dying are independent from the next. It's called math.
The actual problem with CDOs is that the cows were all more diseased than the historical track record suggested (because after they started putting together CDOs, a flawed incentive structure created a new motive to buy sicker cows) and that the probability of one cow dying wasn't independent of the next cow dying.
- mattmaroon 18y agoMake that into a funny comic. I only learn from things spoken in a rectangular bubble.
- nsrivast 18y ago"the probability of one cow dying wasn't independent of the next cow dying" Like if you put them in a pen together ... Explanation fail maybe, but joke succeed!
- prakash 18y agothe probability of one cow dying..independent of the next cow dying. That's a AAA tranche right there ;-)
- helveticaman 18y agoThey didn't know how bad the mortgages really were, and the failure of one mortgage is not independent from the failure of the next. We're seeing this now in neighborhoods were foreclosures are driving housing prices down and making people want to walk away from underwater mortgages. This is starting to happen in California.
- jimbokun 18y ago"The actual problem with CDOs is that the cows were all more diseased than the historical track record suggested" I think you are splitting hairs here. The point remains, all the cows were sick, so Adams' analogy is appropriate. The fact that everyone just ASSUMED that the cows were OK, because they usually weren't sick in the past, instead of just going out and looking at the cows, really doesn't help to make this whole situation less worthy of ridicule. Everyone was saying things like you are saying to convince themselves "no, no, it's more complicated than that, see we have all this math, you don't understand" when the simple truth was that all the cows were sick and just looking at the cows instead of doing the fancy math would have made more sense. Sometimes it is actually better to oversimplify things and just get the big picture and not get lost in all the details. This is Adams' underlying point, and I think it is valid in this case.