I just finished reading When Genius Failed by Roger Lowenstein. This book documents yet another example of humans desire to seek simplification even when that simplification doesn’t truly model reality.
In short, LTC believed they had figured out a way to make money that was very low risk. Each transaction could only make a little money, so they took out huge amounts of loans in order to maximize their return. For 3 years, they returned double digit percent returns to the fund only to lose more than they had made in 5 weeks during 1998. In their models, the chance of this happening was zero; the reality is that they had ‘simplified’ the complexity of life into a formula, and failed.
Many entries on this blog document the various ways that we try to find a simple answer to the complex world around us. This commoditization of life helps us deal with the complexities that we face every day. But if we don’t recognize our over-simplifications, we can easily fall into a false sense of confidence that leads to our own disgrace.
Other entries that illustrate our desire for simplicity: