

The Rise of the Machines - razorburn
http://www.nytimes.com/2008/10/12/opinion/12dooling.html

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sdurkin
Quants had almost nothing to do with this crisis. The problem wasn't that the
computers knew too much, it was that they knew too little. They were fed best-
case-scenario risk analyses. Of course the loans looked good if you assumed
the housing market was going to keep going up.

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ChaitanyaSai
"...because we all know that no one understands credit default obligations and
derivatives, except perhaps Mr. Buffett and the computers who created them."
Statements of this sort are getting really tiresome.

Will some of the derivative designs be made public as a result of the
congressional hearings? Shouldn't that be part of the investigation's purview?

~~~
eru
And why single out Mr Buffet on understanding them? He is a clever guy - but
he is not very keen on derivatives.

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time_management
Ex-hedge quant here. Here's my semi-informed take.

Quants didn't write most of these toxic derivatives, and they weren't
conceived by computers, at least not as far as I know. Though technological
modeling was necessary to value many of these securities (Monte Carlo methods,
etc.) I really doubt that any serious financial company would allow a computer
to conceive of derivatives to any meaningful extent. But I could be wrong.

These contracts, in many cases, were _designed_ to be complex beyond
comprehension, but AI methods don't help make them comprehensible to machines.
I think of these 500-page derivatives contracts as similar to long software
EULAs (which are intended to be so long and dry that 95% "TL;DR" and click
"Accept", while even the diligent 5% miss details)... or to the packets in
which health insurance companies detail exclusions. The things are intended to
be virtually incomprehensible, making it easy for the writer to fool not only
his customers, but also his bosses, by sweeping low probability risks (e.g. an
"unprecedented" nationwide drop in real estate during a strong economy such as
that which existed in mid-2007) under the rug.

Quant funds were not hammered because (loosely speaking) the computers
emergently "tricked" them. They got whacked because all the models were
trained on the past, and 8/2007 - Pres. has been unprecedented. Also, the fact
that a large number of seemingly independent agents (funds) have piled into
the same few strategies means that an unwind from one will lead to losses for
many.

