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To expand on the other replies, and based on experience: 1) The way you get to sell products to investors is by promising some sort of alpha: "My fund is less

To expand on the other replies, and based on experience: 1) The way you get to sell products to investors is by promising some sort of alpha: "My fund is less risky, my derivative pays more for the same risk, etc." 2) But magic does not happen in the financial markets (and when it does is through the old stories.. diversification, transferring the risk to those of broader shoulders, etc.) 3) So what you do is HIDE THE RISK. There are many ways to do that, and they usually involve COMPLEXITY. Complexity and opacity are your friends, as they confuse investors who don't realize there is a hidden risk somewhere there, or a scenario you haven't told them (but put on page 350) where if A B and C happen, then he will lose a lot of money. I'm not joking here.. sometimes complexity is good as it allows you to e.g. reduce mismatches in your risks (your income is in USD and expenses in EUR, your debts are long term and assets short term, etc.). However, the ultimate purpose of most complex products is that they allow you to sell stuff that appears better than it really is. And IT WORKS. Everytime. Against millionaires and against folks buying silly combos of insurances plus deposits (forgot their names).

PhantomGremlin 11y ago
> So what you do is HIDE THE RISK I've been rereading my copy of Taleb's Antifragile. He keeps hammering similar points over and over: complexity, risk, opacity, susceptibility to Black Swans, etc. I think I'd be depressed if I worked on Wall Street and the better part of my compensation resulted from peddling all these confusing products. Still, as you point out, sometimes complexity is good. I do understand that.
mynegation 11y ago
These combos are called "structured products"
wpietri 11y ago
And I would almost be ok with this if the complexity-generators understood all their complexity and were using it as a great trick to steal money from idiots. What really scares me is that a) even the complexity-generators can easily miss potential issues, and b) when you throw all this complexity together, nobody has any clue what's going on. And then we wrap it up all with a bow by allowing finance people to alternately claim that a) they are so smart they deserve to personally make millions to billions, and b) they couldn't possibly be held accountable for systemic fuckups, because nobody could possibly have known. I'll accept one or the other, but the combination is incredibly dangerous.

PhantomGremlin 11y ago

> So what you do is HIDE THE RISK I've been rereading my copy of Taleb's Antifragile. He keeps hammering similar points over and over: complexity, risk, opacity, susceptibility to Black Swans, etc. I think I'd be depressed if I worked on Wall Street and the better part of my compensation resulted from peddling all these confusing products. Still, as you point out, sometimes complexity is good. I do understand that.

mynegation 11y ago

These combos are called "structured products"

wpietri 11y ago

And I would almost be ok with this if the complexity-generators understood all their complexity and were using it as a great trick to steal money from idiots. What really scares me is that a) even the complexity-generators can easily miss potential issues, and b) when you throw all this complexity together, nobody has any clue what's going on. And then we wrap it up all with a bow by allowing finance people to alternately claim that a) they are so smart they deserve to personally make millions to billions, and b) they couldn't possibly be held accountable for systemic fuckups, because nobody could possibly have known. I'll accept one or the other, but the combination is incredibly dangerous.