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Subject:  Re: Countdown to the next financial bomb Date:  10/7/2012  6:42 AM
Author:  AdvocatusDiaboli Number:  405465 of 479767

In essence, the VAR calculations became an extremely complex, precise work of fiction that had virtually no basis in reality and had negligable impact in convincing management to apply the brakes.

There's always the problem with what I like to call "systemic feedback" in economics. You develop a model on the basis of historical data. The conclusion that are drawn from the model influence your behavior (and eventually the behavior of a lot of other people) which changes reality, so your model no longer applies and your conclusions become invalid.

A good example is securitization. The models for developing securitization where originally created on the basis of mortgage data where no or only relatively few mortgages were originated to be securitized.
Of course once you get into mass securitization, mortgages are going to behave a lot differently, as: