Monday, April 9, 2012

Complexity to the power of n

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

I used to like watching horror movies (among other genres).  It seems that each new horror movie has to be just a bit more horrific that the previous one.  If not, it would seem lame and disappointing. It’s great to watch the old original Frankenstein and Drakula movies, but they don’t seem particularly horrific nowadays.  I’m sure that when they were first released the audiences were gripped with terror.  I do remember that when movies like the Exorcist and Jaws came out, they were on the cutting edge of the genre and had audiences hiding their eyes.  In fact, to my embarrassment, the female companion who watched The Exorcist with me in the movie theatre managed a few blood curdling screams.  Nowadays, there are many more scary movies than those.

 

What is the relevance of this?  Well producers of financial products are no different from movie producers.  They need to constantly “improve upon” and outdo the last product that someone came out with.  Over time, complexity increases to such an extent that it becomes impossible for more and more people to tell if the products are useful or dangerous.  Unfortunately, too many people have been too successful at selling such things and too many buyers have been too keen to jump on the bandwagon.  The good news is that many companies have become much more cautious about using anything that is not plain vanilla.  However, bandwagons do have a habit of rolling on and human nature has not changed.  

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