The thing the "quants" never understood, and apparently still don't understand?
The thing the "quants" never understood, and apparently still don’t understand,
is that a 95% probability is NOT the same as a sure thing, but rather 95 chances out of 100. Sure, social scientists (psychologists especially) assume there is a cause and effect relationship once data reaches the 95th percentile; but that does NOT rule out some other cause resulting in the same effect, or– more importantly– the OPPOSITE effect. Not so long ago, the Kentucky Derby was won by a horse with more than double those odds. This has recently been dubbed as the "Black Swan" effect, as if it were some newly discovered phenomenon; but anyone with life experience beyond fraternity pranks can tell you that it happens all the time.
How does that relate to JPM (JP Morgan Chase)? Simple… they are currently holding derivatives valued at 44 times there assets. I suppose they think this gives them more than twice the security of 19 to 1. Heck, they can’t all fail at the same time– can they? Yes, they can… if the whole market goes down! That’s what happened in 1929. But back then the leverage created with 10% margin (putting up 10 grand in securities as collateral to borrow 100 grand– to purchase more securities) caused Roaring Twenties "quants" to lose their asses. How much more will JPM’s quants suffer the same fate with the equivalent of less than 2% margin in a falling market?
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September 1st, 2010 at 11:52 pm
Cool story bro.
September 1st, 2010 at 11:52 pm
what are you rambling on about and why is it posted in this forum??