It worked before!! Who hasn't heard this? It may be that financial engineering takes advantage of this and turns it into a gaming advantage.
Well, many times we learn from observing some effect in nature that is repeatable. At first, we just use the effect if it's convenient. Then, we study the effect to see why it might be so and how to control it better. That's how science and engineering worked, in the beginning. At some point, we let the computer come between ourselves and our science.
As well, when you have some new product you test it before the public gets involved. For instance, we don't put passengers on a new plane before it has been tested and passed muster.
That is, we put the product through the 'oops with loops in order to reduce the odds for oops.
On the other hand, we have not found such in the dismal sciences of economics and finance. There, we experiment in life (real time), and real people get scarred as a consequence. That is, some of the major players get their pockets filled (year-end festivities are reliant upon this); the majority find themselves worse off. Guess what? Again, it's related to the computer. And, we seem to take it for granted that oops are by nature necessary.
Of course, it would be nice if we only experienced oops that result from our own actions, but, in this case, our pain is either someone else's gain or our oops are consequences of the choices of others. Much argument goes into how we get the playing field leveled or just keep the hands of others out of our pockets.
A case in point is the Auction-Rate Security (ARS) which has become problematic of late for many reasons. A Business Week article says that this market has been working for years; ah, yes, it was working. Well, we could take exception to that fact as on the surface this market might have been well-oiled, but a real close analysis could probably find many warts. That the problematics may have shuffled up to visibility shows several things, such as muddied waters bring up the sediments.
There are several things that we could look at with this type of market. However, one lesson might be that we still need to good old model that is behind bonds, such as the Treasuries.
In fact, the ARS has led to the downfall of the student loan industry. Gosh, that one thing alone is atrocious. Too, do the ARS (and tranche-ing) put lipstick on junky pigs?
There needs to be better accounting on who wins and loses. In terms of the ARS, I would bet that many have lost money over the years (during which the market was working in some views) where loss was taken as a lesson learned (for the individual) about the results of improper decisions and unwarranted risks or was taken as an oops. Yet, we see now that the information involved with this market was not as good as many would hope.
Ah, oops just seem to abound where the Street is concerned. How can one build the future on such shenanigans? America, and others, wake up! We cannot stop the world, but we sure do need a better ontology than that of sharks, etc. (Business Week article).
07/23/2009 -- After the bust and the rebound, toxic assets are still a problem due to tranche realities.
06/07/2009 -- Say what?
01/27/2009 -- Lessons to be learned (as opposed to learnt), including, by necessity, Ponzi.