That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior. When lots of investors got too scared to buy or sell, markets seized up and the models failed. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. They focused mainly on figures like the expected returns and the default risk of financial instruments. The risk models proved myopic, they say, because they were too simple-minded. ![]() They, after all, invented the exotic securities that proved so troublesome.īut the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe. IN the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok.
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