The New York Times writes about the dissonance between the quantitative models developed to price, trade and evaluate the risk of cash and derivative products and the broader economic paradigm…
In other words how did the work of so many academically enriched people come to nought?
Can you say “industry wide failure”?
Can you say “frozen credit markets”?
~~~~ “The models were more a tool of enthusiasm than a cause of the crisis,” said Mr. Derman, who is a professor at Columbia University….” ~~~~
Maybe the Street should take a lesson from Silicon Valley and hold some cross firm “developer days“… get those uber-quants out in the open with their models and work collaboratively to build more stable views… crash test the models with tripled short term funding rates… quadrupled default rates… accelerated asset declines… tsunami conditions…
Models aren’t going away… but they can become more robust and more attached to economic conditions… less tools of enthusiasm… more tools of prudence…
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