2009-07-10 10:33 pm
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I got this in stumbleupon: http://blog.granneman.com/2008/11/27/how-con-artists-use-psychology-to-work/
Predictably, there were the comments about how stupid the cashier was to fall to the whims of greed. I argue, however, that this is how AIG -- and much of Wall Street in recent months -- essentially failed.
1. Identified a dislocation and sought to capitalize on it (wow, I can give this necklace to this guy and profit)
2. Designed models of an ideal, expected outcome (profit) without considering externalities (counterparty risk, the fact that people lie)
3. Crash as externality, six-sigma event, black swan, etc. is realized (got cheated)
Remember kids, notional value is NOT mark-to-market value. People lost trillions over this.
