worth reading Mythbusting the Obama Magic

[Dave Farber <dave () farber net>]

Begin forwarded message:

> From: "Jonathan S. Shapiro" <shap () eros-os org>
> Date: January 4, 2010 1:42:33 PM EST
> To: dave () farber net
> Cc: ip <ip () v2 listbox com>
> Subject: Re: [IP] Re: Mythbusting the Obama Magic

> I haven't time for a long post, which is probably good, but there is  
> one point here that I think is worth considering.
>
> While bank lending practices were, in my opinion, largely  
> responsible for the mortgage crisis, it must be acknowledged that  
> banks, trading houses, and insurers suffer in common under what  
> might be termed "the competitive death embrace".
>
> The death embrace is best illustrated by the thinking "If I don't do  
> this marginal deal, my competitor will, so I should do the deal  
> rather than let the benefit go to them." If you review the papers,  
> you'll see countless variants of that statement, and if you pay  
> attention, you'll notice that not one says "benefits and risk".
>
> This attitude is responsible for many investment cycle failures.  
> Most recently the mortgage crisis, but more commonly the cycle in  
> which insurance companies lower their rates in lock step to stay in  
> business, only to find during some catastrophe that their  
> underwriting models were too optimistic. On investigation, they  
> invariably find that (a) the models really weren't very good, but  
> (b) the risk assessment assumptions in the models had been  
> progressively downgraded in response to competitive pressure. This  
> is not a consequence of stupidity. It is a requirement for the  
> insurer's market survival.
>
> In technical contexts, we see companies repeatedly engage in the the  
> "Innovator's Dilemma." The cause can ultimately be traced to the  
> fact that quarterly behavior can be explained to investors while  
> long-term behavior can't. This problem is compounded by the short- 
> term biases of corporate securities reporting. A Warren Buffet  
> understands this very well and reads through it. Most readers of IP,  
> I would hazard to guess, understand it but lack the investment  
> discipline to profit from it (I'ld certainly include myself). Most  
> of the world at large probably has no idea what I'm talking about.
>
> Broadly speaking, investors and customers are quite bad at assessing  
> the long term risk and benefit inherent in this behavior.
>
>
> So one question that I think we need to be asking, as a nation, is:  
> how do we make long-term risk and results more visible so that  
> people can understand it better?
>
>
> Jonathan S. Shapiro



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