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Why Computerized Financial Simulations Failed to Save Wall St

by Tim Stevens on September 19, 2008 at 02:29 PM


In a global marketplace, many variables are tracked in order to predict how the market will react on a given day. It's too many variables for one person, for sure, and in many cases too many for one team. So, investment firms are increasingly relying on simulations to predict how to handle their money, and one insider is saying that faulty systems are at least partly to blame for our current economic woes.

According to Saul Hansell, a journalist who worked closely with investors for 13 years, the simulations were overly optimistic in many cases, purposely designed to ignore some risks in order to dodge rules (put in place by regulators) intended to keep the markets stable. Additionally, some simulations simply had too much perspective: Looking backward over years of solid growth in the mortgage industry, the programs weren't able to see the ripples, and ultimately the waves, that have caused our current financial meltdown.

Of course, the real issue is people who were too complacent and greedy and not watching the results closely enough -- it shouldn't have taken a computer to see that billions in low-interest loans to people with bad credit isn't a great idea! [From: The New York Times]

Tags: economy, simulations, wall st., WallSt.

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