Wednesday, February 25, 2009

How mortgages were mispriced so badly

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant

This article is fascinating. It gets better as it goes along.

The part that struck me most was the line that (paraphrased) "quants who worked with the model weren't responsible for the asset allocation decisions. Their managers were. These managers didn't have the math skills to understand the problems with the model, but they could look at a single number and use it."

In other words, better math education could have stopped a lot of this nonsense. This also supports my mentor's notion that those in charge should always be practitioners of what they're managing, or at least understand how it works.

If you read one article today, this should be it.

1 comment:

  1. Li's original paper blew a bit over my head, but I also liked the article a lot. Good call.
    -Sheff

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