Back in 1998, the world of finance learned a very painful lesson: Models break and markets aren’t efficient.
And with the rise of Donald Trump from sideshow to presumptive Republican nominee, politics has learned the same lesson.
Long-Term Capital Management was a hedge fund staffed by several Nobel Prize winners that possessed a supposedly unmatched grasp on how markets work. The firm had the most sophisticated methods for exploiting any and all inefficiencies, millions and millions of times over. And it blew up.
Chronicled at length in Roger Lowenstein’s brilliant book “When Genius Failed,” the short version of LTCM’s blowup is that a series of misplaced bets that certain interest rates would converge over time — because they always had in the past — went against the firm until they were out billions of dollars.
LTCM’s core conceit was that it believed markets were efficient and any inefficiencies would be corrected in due course.
They were wrong.
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