Why is finance so complex? (2011) • Hacker News Board

Re: Why is finance so complex? (2011)

#91

Post by KaiserPro » Wed, Jul 08, 2015, 8:46 AM UTC

Finance is not complex. It really isn't. if you know the right people you can find out all the information you need. However:

The very foundations of Finance are built on sand

What do I mean by that? Finance is built on the concept of value, or worth. "How much is this gold worth?", "how much is the client willing to pay for this service?"

The concept of value and worth are subjective. They are in the eye of the beholder:

If you ask a thirsty backpacker stranded in the middle of the Sahara: How much are you willing to pay for a 2 litre bottle of water? The answer, most likely is many monies & possible limbs.

Now trying flogging the same water to city trader in a champagne bar.

I can hear you scoffing, "Oh but that's a silly example, the backpacker was practically dead" Correct, worth is subjective. Its based on your circumstances. There are many other examples, the Turner painting in a jumble sale, the sale of a sports car when the wife becomes pregnant, etc, etc.

Complex derivatives are really not complex. They are normally a "RAID" of different types of contracts. What then happens is the end user is deliberately bamboozled into not asking questions.

Re: Why is finance so complex? (2011)

#92

Post by jackgavigan » Wed, Jul 08, 2015, 9:01 AM UTC

Finance is complex because it's basically math. And math can get very complex.

Re: Why is finance so complex? (2011)

#93

Post by peterfirefly » Wed, Jul 08, 2015, 9:04 AM UTC

superuser2 wrote: post #36

avmich wrote: post #21

Earlier quoted context omitted.

Well, there could be some counterarguments. > Allows you to get a mortgage Wonder if that was always so? Didn't people manage somehow to have a house without something which name suggests it will be paid for the whole life? > Allows you to protect yourself with health/car/life/home/title/etc insurance A casino, right? On average you lose, but for a price you buy a hedge against unforeseen? At least unforeseen for you…

You seem to be confusing finance with retail banking. >Didn't people manage somehow to have a house without something which name suggests it will be paid for the whole life? Well, for a while people were indentured farmers, then you got people renting tenements and apartments in cities, with some land-grant family farms/homsteads being passed down through inheritance. Mass suburban home ownership is mostly a post-WWI…

> I don't think you understand banks' roles in philanthropy and education - successful nonprofit institutions like universities draw their operating budgets from interest on their endowments. Were it not possible to park $x billion in account and draw $y million a year in interest for literally forever, many such institutions could not exist.

They used to own land (and peasants!) themselves or they were funded by someone who did (Church/King/Prince). The former was preferred due to the larger independence and stability it gave them.

Copenhagen University used to own lots of land, for example. So did (do) Oxford and Cambridge.

Re: Why is finance so complex? (2011)

#94

Post by cmdkeen » Wed, Jul 08, 2015, 9:36 AM UTC

jcbrand wrote: post #77

kristjansson wrote: post #70

Earlier quoted context omitted.

The nominal value of the notes in the derivatives market is extremely large. However, we can't equate $500B notional of e.g. CDS written against Apple debt with $500B of Google stock. The CDS represents (1) to the seller, an small initial premium and a large, extremely low-probability liability requiring some collateral, and (2) a stream of future payments from or to the buyer, depending on the cost of insuring the d…

> and a large, extremely low-probability liability requiring some collateral Having read up on the topic, the problem appears to be that this probability cannot be accurately determined, due to useless models being used (e.g. Normal distribution to model complex phenomena). So the probability is often not so low as the financial experts think. Besides that, it does happen that the liability becomes due, as in the 200…

Well it gets more complex when you add mark to market into the mix. Plenty of the financial products that "blew up" in 2007/2008 were actually very profitable for those able to hold on to them.

Re: Why is finance so complex? (2011)

#95

Post by cmdkeen » Wed, Jul 08, 2015, 9:44 AM UTC

alextgordon wrote: post #44

bluedevil2k wrote: post #42

Earlier quoted context omitted.

You need a mortgage because you don't have $400,000 in cash sitting around. You need insurance because you don't have the personal finances to adequately cover the risk of "life"

If we live in a democracy, and money is backed by the state, why do we have to pay interest to profit-making banks and insurance companies? Giving out mortgages is not difficult. You just have to be a bank. Not only that but 2007 showed that profit-making banks are even worse than a reasonable person, or precocious five year old, would be at deciding who should be given a mortgage. Mortgages are a necessary part of s…

Except Fannie May and Freddie Mac were a significant part of the reason that bad mortgage lending was made - because politicians wanted more people to be home owners. Profit making banks should be the reason that lending decisions are strict.

It wasn't just banks making poor decisions in 2007 about who should have a mortgage.

Re: Why is finance so complex? (2011)

#96

Post by amelius » Wed, Jul 08, 2015, 9:45 AM UTC

vezzy-fnord wrote: post #23

h8trswana8 wrote: post #14

The world of finance makes these aspects of your life function: * Allows you to get a mortgage * Allows you to protect yourself with health/car/life/home/title/etc insurance * Pays for your highways/stadiums/schools and other public works * Protects your deposits * Pays for your retirement * Funds the college fund that paid for your school * ... Or the student loans that allowed you to attend school * Supports the gl…

The fallacy here is assuming that because it does all of those positive things, it must therefore holistically be optimal. Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. Why would such an assumption be naive? It doesn't seem naive to me at all. I was reading a 1994 paper that I posted recently called "A Uniform Name Service for Spring's UNIX Environment" which…

This is why we should have more software architects and systems engineers working in politics. They know how to deal with problems at multiple levels of abstraction, and they know how to keep complexity down.

Re: Why is finance so complex? (2011)

#97

Post by toothbrush » Wed, Jul 08, 2015, 9:48 AM UTC

cm2187 wrote: post #88

pimlottc wrote: post #68

Earlier quoted context omitted.

Isn't that an example of complexity that is being successfully coped with, thanks to the abstractions provided by the various industries and institutions that provide raw materials, processing, shipping, etc?

The fact that every man in the street doesn't understand the mechanisms of these product doesn't mean they can't be copped with. In fact the most benign parts of banking are most likely completely obscure to most people (payment systems). I don't think the 2008 crisis was caused by complexity. Most actors on these structured credit markets understood well the products. It was rather caused by over leverage and compla…

For people wondering about complexity of financial products, and if individual banks and traders did or did not precisely understand the implications of what they were doing, i wholeheartedly recommend everyone read Dit kan niet waar zijn (This cannot be true) by Joris Luyendijk. He spent about a year doing “anthropology” in the London financial sector, and it's a fascinating, horrifying read. I'm not sure if that book has been translated into English yet, but otherwise his column at the Guardian makes for equally good reading [1].

1. http://www.theguardian.com/commentisfree/joris-luyendijk-ban...

Re: Why is finance so complex? (2011)

#98

Post by Seanambers » Wed, Jul 08, 2015, 9:56 AM UTC

_nedR wrote: post #72

h8trswana8 wrote: post #14

The world of finance makes these aspects of your life function: * Allows you to get a mortgage * Allows you to protect yourself with health/car/life/home/title/etc insurance * Pays for your highways/stadiums/schools and other public works * Protects your deposits * Pays for your retirement * Funds the college fund that paid for your school * ... Or the student loans that allowed you to attend school * Supports the gl…

>Financial innovation make our lives more predictable and less sensitive to chance. lol.

Go live in a world where theres no securitization of debt, no interest on debt, no mitigation of risk, no insurance against risk, hell even no banks.

No banks means no jobs, bad housing, no tools, no pc's, no security, no stores - but that dosnt matter, cause you dont have any money either, bad food, no mass production++

Most people commenting in this tread has no concept about what finance is and does, so it must be inherently evil.

Well, the world is more complex than that. Without finance your standard of living would probably be below one tenth of what it is now -unless you already live on the street of course. But then you wouldn't care because you'd probably be a alcholic or druggie. You won't get hold of any drugs or boose either so your fucked as well.

Tldr; The world runs on debt & oil. Get used to it, it isn't going to change anytime soon.

Re: Why is finance so complex? (2011)

#99

Post by anonymoushn » Wed, Jul 08, 2015, 9:56 AM UTC

fsk wrote: post #49

dllthomas wrote: post #48

Earlier quoted context omitted.

Time gives the money a chance to grow if there is anywhere that offers a safe return . Lending at a negative interest rate is paying someone to keep your money safe. Borrowing at a real negative interest rate may not make sense if you aren't sure you can do that.

Actually, it was a bad example. Suppose you spend $1M to produce something worth $100k. You lost $900k. But suppose you borrowed at 0% while inflation was (to use round numbers) 10%. After about 50 years of borrowing at 0%, your $100k is now worth more than $1M. (I'm too lazy to use logs to figure out the exact breakeven point right now.) You made a profit. With 0% interest rates, your investment that destroyed $900k…

So in this scenario, you either got an indefinite-term loan with a 0 interest payment, or you took a big risk by betting that the cost of borrowing would not increase until you could pay down the loan.

Re: Why is finance so complex? (2011)

#100

Post by zo1 » Wed, Jul 08, 2015, 10:21 AM UTC

jsprogrammer wrote: post #58

bmelton wrote: post #54

Earlier quoted context omitted.

Even if the banks weren't trying to make a profit, you'd still have to pay interest as loan-making is inherently risky enough that at some point, somebody has to cover the costs of those who default.

Defaults exist because it is a loan-backed currency.

Defaults have nothing to do with "loan-backed currency", as if that statement means anything.

You could have a default on a loan if you were paying for your house with NukaCola bottle-caps, or engraved-crab-shells.