Mr. BW is a chess and poker whiz according to the article. So how is it that someone who is so good a figuring out probabilities got into such a mess? I am sure he is saying it was because of the unprecedented move in credit default swaps and other esoteric instruments and that excuse will be bought by untold number of investors.

The problem is, just like Brian Hunter (also formerly of DB if my memory serves me right) brought down Amaranth in 2006 with his second set of “unusual markets”.

See probabilities are not enough if you don’t also listen to your instincts and learn to tolerate the miserable feelings of being nervous or predicting that something could go wrong. That kind of Emotion Analytics would have saved Boaz …. or Brian or…..

Those who survive and thrive in these markets are those who will learn to do both. In fact, the “alpha” edge will most certainly go to those who learn the chess of the markets – which is a game about people and not about statistics.

Chances are if you are reading this, you aren’t a person who needs a refresher course on this but did you know that effectively there was a futures contract in 1500 BC? In “Iraq” no less? Or the real role of credit – over time? Having been raised in a post-depression, no debt household I actually am MORE fond of the use of debt for having read this chapter.

See the thing in my mind is NOT that the banks created structured products but that 1) they were not exchange traded 2) the overall number of market players was very limited (see #1). Then you have the rating agencies …. (talk about a Madoff-like “relationship based decision”) but what about President Bush’s “ownership society” and MOST of all, the people who took out mortgages they KNEW they couldn’t afford!

Part of me wishes I would have realized that I could get that mortgage on the 3.5 million dollar house in Old Greenwich…. but oh well, I wouldn’t have done it anyway because in my own mind, the math wouldn’t have worked – even if it did compute to the mortgage broker.

I digress…. what I meant to say is I personally think the book is worth reading even if the Economist basically trashes it.

This market sell-off is bolstering that viewpoint. I can’t say I thought of it myself this time as I heard it from Dennis Gartman on FAST MONEY (CNBC) but he is right – and it made me think of Sept. 11. When there is no human to make a bid, the markets go south.

btw… this isn’t far from the argument I made a few weeks ago about how if the mortgage-related products (CDO’s and CDS’) had been exchange traded – even pit traded – then we would never be in this kind of mess to begin with. (- did you notice that the CME and Citadel are setting out to do just exactly that!)

Markets are made up of humans – and human methods of interacting. Markets are nothing more than beliefs and feelings about the future. Computers don’t have beliefs and feelings. They just do what the humans tell them – and if they do exactly what we tell them, which they do, just like in a pseudo-Matrix like event, they can take over.