Recipe for Disaster: The Formula That Killed Wall Street

[Lake Hills Renter]

[sniglet]

While it's fascinating to read about how Wall Street became enamoured with flawed, simplistic, mathematical formulas to determine risk, I think this is more of a symptom of the mania than the cause.

Behind every bubble is a rationalization, and justification, to argue that the old rules no longer apply, and that sky-high asset prices really do make sense.

If Wall Street hadn't used the formula described in this article they would have found something else to pin their hat (and bubble) on.

It all boils down to this: when there has been a long period of time with no financial chaos, or disruption, people start to feel invulnerable and will begin to undertake ever riskier actions. Our memories are just too short. All we can remember is what's happened in the last 20 years. Thus, if housing defaults have been fairly low for 20 or 30 years, then people will conclude they will always remain low.