Scientists Prove Toxic Assets are Impossible to Regulate • Hacker News Board

Re: Scientists Prove Toxic Assets are Impossible to Regulate

#21

Post by roundsquare » Fri, Oct 23, 2009, 4:27 AM UTC

jerf wrote: post #15

A lot of people are complaining that NP-hard doesn't mean you can't get good approximations. I would like to remind you people that we are not talking about abstract problem spaces where you can count on the problems being essentially "randomly selected" for some suitable definition of random. We are talking human-created financial instruments, being created by agents with every incentive to game the system. Complexi…

Very true. Especially if the approximation algorithms become well known, people can find ways around them.

I wonder if some sort of game theory and/or randomized algorithms can help...

In any event, the root problem was still giving loans to people who shouldn't have gotten them. Regulation really needs to focus on that...

Re: Scientists Prove Toxic Assets are Impossible to Regulate

#22

Post by sfnhltb » Fri, Oct 23, 2009, 6:08 AM UTC

I would have thought the idea that CDO sellers keeping the most vulnerable tranch protecting against cherry picking was a fairly obvious non-starter anyway. (The following will be massively oversimplified for easier explanation, but I think it still applies in the far more complicated real life equivalent)

If I make 10 CDOs and I think 5% of the underlying assets are bad, if I share them out equally the top tranch takes all the damage for each CDO - if the top tranch is 5% then I make nothing basically. If I make one CDO with 50% bad assets, and 9 with 100% good assets, then some of those losses go to other people deeper into the bad CDO tranch, suddenly 90% of my assets pay off instead of 0%.

Re: Scientists Prove Toxic Assets are Impossible to Regulate

#23

Post by cousin_it » Fri, Oct 23, 2009, 10:36 AM UTC

anamax wrote: post #17

Why would anyone think that the value of a non-trivial asset could be expressed as a single number? Let's consider a house. Clearly the amount of money that someone would pay for said house varies from person to person. Which value is "correct"? Before you jump in with some clever aggregation function, suppose that the owners want to sell said house. Will they agree to the value that your aggregation function produce…

Let's consider a house. Clearly the amount of money that someone would pay for said house varies from person to person. Which value is "correct"?

The one that actually results in a deal happening, which often means the highest amount on offer. The more standardized a good is and the more it's traded, the more well-defined its price is. If deals don't happen, there's no market-clearing price, e.g. no way to price sex with Mother Theresa.

Before you jump in with some clever aggregation function, suppose that the owners want to sell said house. Will they agree to the value that your aggregation function produces?

Yes they will, by my definition above :-)

Re: Scientists Prove Toxic Assets are Impossible to Regulate

#24

Post by anamax » Fri, Oct 23, 2009, 7:35 PM UTC

cousin_it wrote: post #23

anamax wrote: post #17

Why would anyone think that the value of a non-trivial asset could be expressed as a single number? Let's consider a house. Clearly the amount of money that someone would pay for said house varies from person to person. Which value is "correct"? Before you jump in with some clever aggregation function, suppose that the owners want to sell said house. Will they agree to the value that your aggregation function produce…

Let's consider a house. Clearly the amount of money that someone would pay for said house varies from person to person. Which value is "correct"? The one that actually results in a deal happening, which often means the highest amount on offer. The more standardized a good is and the more it's traded, the more well-defined its price is. If deals don't happen, there's no market-clearing price, e.g. no way to price sex…

The market clearing price is one definition o "value", but the folks complaining about complexity of derivative pricing are clearly unwilling to accept it.

BTW - Folks who don't participate in a deal often complain that the price at which it occurred was "wrong". Folks who can't find someone to buy from them at the price they want have an analogous complaint.