Say, if you are so smart why can’t you keep from going broke?

Most often when risk is assumed it is unintentional – by overconfidence in the accuracy and completeness of possessed information and analytical skill. The nature and extent of presented risk is simply not perceived rather than consciously assumed.


People learn lessons in the market – but not for ever. Sooner or later they forget them. They once again become overconfident in their information and analytical skill. They unknowingly assume risk that they did not perceive. The question of a repeat of a past disaster is not if, but when.

Witness:


Remember Long Term Capital Management’s debacle (1998). The lesson learned was found in Merrill Lynch’s contemporaneous annual report where it was observed that mathematical risk models "may provide a greater sense of security than warranted; therefore, reliance on these models should be limited."

We learned for a while but the use of the Gaussian Copula formula* as a risk modeling device in rating sub-prime mortgage pool securities was not limited and provided an unjustified sense of security (even to, you guessed it, Merrill Lynch) which led to 2008’s even bigger debacle.

That’s why.
 * see  http://gregtevis.blogspot.com/2011_02_01_archive.html