simplicity

Interesting perspective on the financial crisis and a potential solution. I am not sure that forbidding “money management as we know it” is the only solution. But he does bring up a great point, that the incentive to compete and the thrill of gamesmanship for money managers has really created a competition where the general public, in the end, loses out.

The mathematics of probability that govern the trade-offs of risk and
reward are fundamentally counter-intuitive.

The reason that societies ban pyramid schemes outright, instead of
relying on the market to make them unprofitable, is that most people
trust their intuition, and their intuition leads them astray. If you
were to wait for the market to run its course on a pyramid scheme, the
losses could devastate a whole country, as Albanians found out a few
years ago.

In our days of outwitting casinos around the world, we have come
across many people who thought that they also had a great system, but
were in fact compulsive gamblers who eventually lost everything.
Among the false systems that intuitively feel right, there is none as
insidious and deadly as the Martingale, where a player doubles his bet
after every loss.

The Martingale system works as follows: suppose you need an extra
0. You go down to your nearest casino, and bet 0 on a hand of
blackjack, or on any other almost 50/50 proposition. Should you win
right away, you have reached your goal and gotten your money. Now if
you lose, you bet 0. If you win the second bet, you’re up 0
over all and once again successful. But a little more than one out of
four times you’ll lose both, and end up down 0. In that event you
simply bet 0. If you lose again you bet 0, and you just keep
doubling your bet until you win once. Clearly you have to win at
least once eventually, and with this system you end up with your 0
profit even if you start out losing for a while. If you’re willing to
bet up to ten times for instance, your chance of losing all ten bets
is close to one in a thousand. That means that with a probability of
almost 99.9%, you will win one of those ten bets, and therefore walk
away with your 0.

Source – The real cause of the financial crisis