Saturday, June 18, 2011

Models don't kill banks; bankers kill banks

Thoughtful article by the author of The Management Myth on the role models played in the financial crisis (from 2008)
Well, with all due respect to the billionaire financial geniuses of the world, I just don't buy it. Modern financial models are highly imperfect, to be sure, and we the modelers are insufferably arrogant. But models don't kill banks; bankers kill banks. We geeks may grunt a lot (we want the world to know how laborious our calculations are), but the truth is that our models aren't that hard to build, and they aren't that hard to take apart. When bankers and their advisers fail to question the premises of these models, it's usually because they find those premises quite congenial. The models merely provide an excuse to exercise a faculty for which human beings have always shown a special talent, namely, wishful thinking. What's worse, they also provide the financial community with a rhetorical device for persuading government officials that banks are, by virtue of their purported technical expertise, capable of achieving that audaciously oxymoronic state of being known as "self-regulation."
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