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Recipe for Disaster: The Formula That Killed Wall Street

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SimonPB
Valued Contributor
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5 REPLIES 5
Amar
Contributor
As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it." Don't think you can blame his formula, think it's peoples lack of understaning that mathematics is an exact science, while statistics is far from it.....
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Its like people blaming Kiyosaki for the housing bubble. How many times did he repeat - "only buy when you have positive cashflow", and they only heard the "only buy" part.
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What this experience has taught us is that the market does not price the risk of credit default correctly. The model was based on the assumption that it does.
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Amar
Contributor
How often does the market price anything "Correctly"? always overshoots up and down side....
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Vano
Regular Contributor
Mr. Li's formula was based on an assumption. He assumed that the market could accurately assess risk. Hanging trillions of dollars on one man's assumption, is what I call criminally irresponsible. We all know that assumption is the mother of all f-ups. Assuming that someone else's assumption is correct, is predictably, a recipy for the mother of all f-ups.
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