Securities' Model Failures

                       

Mathematical models have at times done poorly in preventing financial meltdowns.

                       

I refer to two examples, the LTCM (1998) and the subprime mortgage (2008) disasters.

                       

Why did the math models behind them fail? They were made up by top researchers, mathematicians, and celebrated “quants,” who figured they had anticipated all cyclic contingencies.

                                           

Still, bond markets eventually fell apart despite their calculations. Afterward, the ones responsible found they should have looked at contingencies even further back than they had.

                       

I see a bottom line weakness in math models, no matter how much research is done. It happened with the LTCM breakdown. It very definitely is what I feel was a factor in the subprime crisis, which haunts America and the world to this day.

                       

There is a common thread between the two breakdowns which has to do with the fact that we react to problems with panic. That is because our “experts” who come to the rescue are unfortunately from the financial community, attuned only to the short term. They cannot see how caution and avoiding over- zealous, impulsive action can overcome the danger. So they act in haste.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)