Your SlideShare is downloading. ×
0
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Financial Crisis
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Financial Crisis

16,734

Published on

The real causes of the financial crisis: incentives, risk management, and complexity.

The real causes of the financial crisis: incentives, risk management, and complexity.

Published in: Business
16 Comments
41 Likes
Statistics
Notes
No Downloads
Views
Total Views
16,734
On Slideshare
0
From Embeds
0
Number of Embeds
11
Actions
Shares
0
Downloads
2,777
Comments
16
Likes
41
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. THE REAL CAUSES OF THE FINANCIAL CRISIS A Max Capital presentation
  • 2. MANY CAUSES HAVE BEEN NAMED: CDO’s R UBLIC S REPU CANS DEM RATS D OCR S D short S sellers ’s THE FED s GREEDY EXECUTIVES REAL ESTATE SPECULATORS
  • 3. But there are SYSTEMIC reasons for the crisis:
  • 4. 1.INCENTIVES
  • 5. 1.INCENTIVES 2.RISK 2 RISK MANAGEMENT
  • 6. 1.INCENTIVES 2.RISK 2 RISK MANAGEMENT 3.COMPLEXITY
  • 7. misaligned INCENTIVES were pervasive
  • 8. If you give i a mouse a cookie…
  • 9. If you give i a mouse a cookie… he’s going to t wantt some milk.
  • 10. (i.e.) When you give someone something, g,
  • 11. (i.e.) it will drive and shape their behavior.
  • 12. Bad incentives were everywhere… MORTGAGE EXECUTIVES BROKERS RATING HOME BUYERS AGENCIES
  • 13. There was IMME ATE no l-i-n-k EDIA AC ONS CTIO S between FUTURE and CONSEQUENCES
  • 14. Giving a manager part of the profits may not sound b d d bad…
  • 15. But when they aren’t punished for t ki f taking long-term risks… l t ik
  • 16. then that’s what they’ll do. And the th company will pay the price. ill th i
  • 17. companies d d ’t didn t MANAGE RISK correctly tl
  • 18. One example is Value at Risk
  • 19. The VaR analysis y tries to give the firm a look at how much risk it’s taking.
  • 20. It starts with the analysis of historical data & statistics
  • 21. The data is then run through a bunch of advanced models
  • 22. The final result is a $ amount for a certain percentile & time
  • 23. This means that 98% of the time time, y your investments won’t lose over $20 million in a one-month p period
  • 24. There are 3 reasons why VaR causes problems: bl
  • 25. Keep in mind that ALMOST ALL financial firms use VaR to manage risk
  • 26. 1 st We’re not very good at judging extremely rare risks
  • 27. 1 st For example, we can guess the odds of rain tomorrow fairly well
  • 28. 1 st But the odds of an earthquake will be much less accurate
  • 29. 1 st Without Witho t the ability to abilit judge these rare risks, the VaR models aren’t very useful
  • 30. 2 nd Historical data Hi t i l d t doesn’t necessarily predict future returns
  • 31. 2 nd Garbage in, garbage out. in ot
  • 32. 2 nd Garbage in, garbage out. in ot
  • 33. 3 rd VaR ignores the worst- worst case scenario So losses could be:
  • 34. 3 rd
  • 35. 3 rd And this loss could wipe the p company out
  • 36. COMPLEXITY is one of the biggest f gg problems of the market
  • 37. Some ENGINEERING concepts can help explain the issue p
  • 38. TIGHT COUPLING: Every component is tightly linked
  • 39. When something is TIGHTLY COUPLED, it provides no slack if there is a problem, problem AND NO OPPORTUNITY TO INTERVENE.
  • 40. LIKE AN ASSEMBLY LINE...
  • 41. OR MAKING BREAD. BREAD (once the yeast is added)
  • 42. INTERACTIVE COMPLEXITY:
  • 43. INTERACTIVE COMPLEXITY: A complex system with components that interact in unexpected ways
  • 44. A university is complex, but not tightly coupled
  • 45. There are many components that interact, but not a lot of problems. There is plenty of slack and time to fix any issues.
  • 46. THE PROBLEM IS WHEN SOMETHING IS BOTH INTERACTIVELY COMPLEX AND TIGHTLY COUPLED
  • 47. A NUCLEAR REACTOR IS ANOTHER GOOD EXAMPLE EXAMPLE.
  • 48. It’s EXTREMELY COMPLEX. C-H-A-I-N Any problem REACTION can cause a DESTROYS that and POISONS the system the surrounding area.
  • 49. SOUND FAMILIAR
  • 50. FINANCIAL MARKETS are another perfect example. example
  • 51. FINANCIAL MARKETS WILL NEVER BE SIMPLE
  • 52. HOWEVER, HOWEVER COMPLEXITY LESS WILL CRISISMORE RARE MAKE A EASIER TO AND SOLVE
  • 53. So, as long as these PROBLEMS aren’t solved: ld
  • 54. 1.INCENTIVES 2.RISK 2 RISK MANAGEMENT 3.COMPLEXITY
  • 55. THERE WILL BE MORE MELTDOWNS O OW S IN THE FUTURE (They might look different, but the t th outcome will be similar) ill b i il )
  • 56. CREDITS Slide 40 Charlie Chaplin ( Slid 40: Ch li Ch li (www.doctormacro1.info) d 1i f ) Slide 44: UCLA (knifetricks.blogspot.com) Slide 45: Harvard (outdoors.webshots.com/photo/1180073619050918329ZHUCAf ) p Slide 47: Courtesy of Boeing Slide 52: NYSE (www.cnn.com/CNN/Programs/anderson.cooper.360/blog/archives/2008_ 01_01_ac360_archive.html) 01 01 ac360 archive html) CONCEPT RESOURCES Rebonato, Riccardo. Plight of the Fortune Tellers. Princeton: Princeton University Press, 2007. Bookstaber, Richard. Bookstaber Richard A Demon of Our Own Design. Hoboken: John Wiley & Sons, Design Sons 2007.

×