• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint

Summary

The LTCM debacle was one of the most spectacular investment blunders ever seen on Wall Street. Interestingly, it was different than most other Wall Street tragedies in that the money was lost honestly. That is, LTCM did not do anything illegal or even immoral. Yet, the consequences were devastating for the partners and many investors. Fortunately, the Fed moved quickly to prevent the fallout from reaching the rest of us.

Although the eggheads used sophisticated trading techniques and tools, their mistakes are rooted in the same problems that affect us all. For example, a long string of successes contributed to their becoming overconfident. Just like other overconfident investors, this caused them to increase their level of risk. They did this by taking on more leverage and by selecting some higher risk investment positions. In addition, they also put too much faith in the patterns their computer models identified. People have a tendency to extrapolate past trends: Identifying the trends with sophisticated models doesn't reduce the human nature in interpreting them. Indeed, it might magnify psychological biases.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint