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Overcoming Bias Commenter's avatar

jor: I agree BS was overlevered. So, sure, mistakes were made, as obvious by their failure. But the idea of Black Swans don't get at their essence. Hubris? I don't think it helps to merely say people should not have hubris--no one intends to have this. Do not have faith in bad models? Again, no one attempts to do this. Expect the unexpected? What does that mean? Taken literally, one should never invest in anything with a gestation period.

I had no idea Inv banks like BS and UBS warehoused so much asset backed securities, which doesn't make much sense, but that error is from bad transfer pricing, because it should have never made economic sense for a bank to borrow at the AA rate to buy AA or AAA Mortgage backed securities. A good transfer pricing system would have stopped that. If you read UBS's report to shareholders, they go over the errors pretty well (which were similar to Bear's), you can google it, released around April of this year. That's a boring reason, but gets at their mistake pretty well. More fundamentally, the failure of mortgages was a function of relaxing underwriting standards over the past 15 years, and I think best laid out it Stan Liebowitz's piece, which is a fascinating tale, but again, the Black Swan is pretty irrelevant to that line of analysis.

Now, to say they repeatedly make the mistake of going bankrupt, anthropomorphizes the market in a silly way. Some people make mistakes every 5 to 10 years in a systematic way, but they are different people, in different fields, making mistakes about different financial structures. But the annual default rate for nonfinancial companies, historically, is around 1%, so they usually do not make mistakes, though it clusters over time (eg, 2001, 1990, 1981, 1970). Every panic, or crisis, is different, because people aren't so dumb as to make the exact same mistake twice. I don't see the Black Swan as a fruitful way to group these mistakes, because 'overconfidence' is merely evidenced by failure in these contexts, like saying don't buy assets that will decline a lot in value.

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Overcoming Bias Commenter's avatar

Combinatorial prediction markets allow one to ask billions of questions at once, which will cover a lot more black swans.How does that work?

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