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Originally Posted by Botnst
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Taleb understands the math, understands the underlying concepts and argues that it exposes us to unexpected events. Before all of these wonderful models came along investment bankers and stockbrokers were more conservative (in the financial sense) because they feared the unknown and so, faced the unknown with caution. With all of the modeling and such people self-deluded into supposing that they understood risk and therefore, discounted it. Taleb says we fundamentally do NOT understand risk and worse, the more we delude ourselves, the greater our exposure to disaster.
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In the show I linked it seems that the borrowers, the brokers, and the dealers all knew, at least in some corner of their thought process, that there were big risks involved. But like Bernake, they chose to sight only examples that didn't discredit their choice to gamble. The motive was simple. If you win you gain big, if you lose you gain nothing, or in some cases, you still gain big. What no one considered at the market end of the lending was that the practice could kill the golden goose, or rather kill the market for golden eggs. The key to initiating the decision was the lure of the vast new pool of wealth that has recently appeared in the world as industrialization has spread. The only way to keep up with it's appetite for instruments was to relax the rules of lending to the point that, by the end, they were all cast aside save the signature. The real tragedy is that those bankers who 'knew better' 5 years earlier were convinced by circumstances to just say F it in the name of growth indexes. I wonder if the models would work better if the folks employing them were in a position to suffer the losses they indicate or fail to.