Preventing Financial Meltdowns With Models

Vaunted mathematical models have done poorly in preventing financial meltdowns.

Example: The LTCM debacle of 1998 and the sub-prime mortgage disaster of 2008. Could they have been prevented or even mitigated?

These math models were made up by top researchers, mathematicians, and “quants,” who figured they had anticipated all cyclic contingencies.

Yet, bond markets fell apart despite the calculations. Afterward, the quants found they should have looked at contingencies even further back than they had.

But I see a weakness in math models, no matter how much research is done. It happened with the LTCM breakdown and was a factor in the sub-prime crisis.

There is a common thread between the two breakdowns which has to do with how we react to problems in a panic. Our “experts” who come to the rescue are from the financial community, attuned only to the short term and cannot see how caution, and avoiding panic can overcome the danger of acting in haste,