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Smith
Faculty Opinion Article
The 30
Seconds Outlook
January 1, 2009
“The forces
that hit financial markets in the .
. . summer of 2007 seemed like a
force of nature, something akin to a
hurricane, or an earthquake,
something beyond human control.” --
Gary Gorton, Working paper, Yale
School of Management, August 28,
2008.
The Credit Crunch has been a
cruel teacher of what needs to be
changed in the world of financial
markets. The most important change
required lies in the mindset of
financial players and regulators who
ignored the low probability of a
really devastating “Black Swan”—a
really scary crisis that was way
outside the negative standard
deviation assumptions of the normal
distribution. So why worry?
Investment bankers were not looking
beyond the tens and more millions
they were making. “Greed” became
even a bigger god—so “let the good
times roll.” “Goldilocks” markets
created assumptions of more of the
same. Business models did not
include correct assumptions about
how bad things can get with a Black
Swan crisis, and neither did they
include what specific market
strategies should be taken to
maintain reasonable risk levels at
all times, and to further reduce
risk when imperative to do so.
John A. Haslem
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