Recipe for Disaster: The Formula That Killed Wall Street

If you ever wondered how we could have found ourselves in this predicament, this is an excellent article on the recent financial collapse explaining how the over-use and over-reliance on an over-simplified formula led to the huge conflagration we are all dealing with now. Basically, in a greedy quest for not only big money, but easy big money, the financial "wizards" became enamored of using a formula that gave them a single, simple number to quantify risk.

The problems with this are many: 1) real world financial risk cannot be boiled down to a single, simple number [overreaching], 2) the model was based on data only from the recent (housing) boom period [bad assumption], 3) the effect of everyone using the same model/formula was not accounted for [naive], and 4) the greedy users of this formula ignored it's stated limitations [stupid].

## 2009-03-03

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