Tuesday, January 12, 2010

A brilliant paper on the financial crisis

I actively look for papers (blog posts, articles, books, whatever) that disagree with me or contain a new idea that I have never seen before.  Marginal Revolution pointed out one such piece, here, on the causes of the recent financial crisis.

If you have any interest in understanding the real root cause of the recent financial crisis, then you have to read this paper.

Have you ever heard of the Taguchi Method?  Google it sometime.  The short version is that it is a method of analyzing problems and plans in order to ascertain the cause of the problem or the real outcome of a plan.  I used to have a shorthand version of it done as artwork on my wall at Journyx.

When you form a plan you ask yourself, "and then what will happen next?", over and over again, at least five times.  If you adequately think through the wants and needs of your competitors, etc., then you will have a very good idea of the real future that this plan will set into motion.

When you find a problem you ask yourself, "and why did that happen?", over and over again, at least five times.  If you keep going you will get to all root causes, like gravity and hunger.  At that point you fully understand why the problem occurred, and you have an accurate map from which you can plan your remedy.

In this paper the authors do the next level of Taguchi analysis, and get beneath the common factors of CDOs and greedy folks on Wall Street.  I can't recap it succinctly, yet.  But on just my first reading the entire picture is different and I understand the world financial system better than I ever have.

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