Inherently Risky Business

The Wall Street Journal ^ | June 16, 2008 | L. GORDON CROVITZ

[gpapa]

As the first anniversary of the credit crisis approaches, it's clear that a major part of the problem was a spectacular failure of information, with complex asset-backed securities turning out to be far riskier than anyone thought. But as sophisticated as we consider ourselves, this is just a contemporary example of what might be called the Problem of the Oblong Dice.

The first game of dice, played by ancient Greeks, Romans and Egyptians, used astragali, animal ankle bones that are more oblong than square. Yet rolls of the dice got the same score whether the dice ended up on a narrow face or on a wide face. Anyone who understood that the odds of landing on a narrow face were much lower would have been a big winner, but instead for centuries our ancestors treated all sides of an oblong as equal. There was no concept of probability, perhaps because "zero" was not understood by most educated Westerners until about the year 1000.

[bruinbirdman]

Cheaper Oil, Stronger Dollar Drive Asia Higher

Stay away from financials.

yitbos

[Caipirabob]

it's clear that a major part of the problem was a spectacular failure of information

You can have all the information in the world, however if someone is determined to defraud the system, you're going to need more oversight or internal controls. When people at the highest level are committing the fraud, you need to be looking at the institution as a whole.

[Regulator]

Ahh, so the propaganda campaign is under way.

"It's not our fault, how could we know"

"It's a roll of the dice, we can't be blamed!"

"It's someone else's fault, those mean people LIED to us!"

What a bunch of crap. They bought and sold bad paper based on joke assumptions and outright fraud.

[fightinJAG]

This was a very interesting article, and I appreciated being introduced to several genuinely useful concepts and illustrations (such as the oblong dice). Thanks!