Overconfidence leads one to seek leverage. Leverage in turn magnifies the consequences of errors. Leverage on LTCM’s scale, which dwarfed that of its predecessors, turns errors into catastrophes.
Another, probably more important lesson concerns the degree to which one should rely on historical data. If something never has happened, or at least not recently, one cannot safely bet the house that it never will happen.
I probably shouldn’t have speculated on what “popular belief” does or does not hold, but it has often been written, falsely, that LTCM was unhedged against Russia defaulting on its own bonds.
Overconfidence leads one to seek leverage. Leverage in turn magnifies the consequences of errors. Leverage on LTCM’s scale, which dwarfed that of its predecessors, turns errors into catastrophes.
Another, probably more important lesson concerns the degree to which one should rely on historical data. If something never has happened, or at least not recently, one cannot safely bet the house that it never will happen.
I probably shouldn’t have speculated on what “popular belief” does or does not hold, but it has often been written, falsely, that LTCM was unhedged against Russia defaulting on its own bonds.