After the stock market meltdown of the past year, financial experts from Wall Street and academia are putting more effort into bringing behavioral modeling into their complex financial calculations (NYTimes).
The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.
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