Monday, December 03, 2007

Predicting the Predictors

Although I'm not a financial engineer, the complexity of the financial models used on Wallstreet have made me nervous for some time. Why? When the models become so complex that their mechanics are no longer well understood, how does one know whether one is predicting real market forces or if one is merely predicting the predictors? Seems to have the potential for some nasty, bubblicious feedback loops. I'm not sure if that's been the case, but it seems others who know better are nervous as well.

Krugman: "This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created."



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