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March 26, 2007
Wall Street 2.0 and Tightly Coupled Systems
Two great books worth reading that came to mind during the Janeway/Bloom Wall Street panel here at ETech, only one of which was mentioned on stage:- Why Smart Make Big Money Mistakes and How to Correct Them. Great, readable book on practical behavioral finance.
- Normal Accidents. Fascinating, deep-think read on accidents, tightly-coupled and loosely-coupled systems, and the implications of technologies that create low-buffer real-world systems.
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Tightly coupled networks don't respond well to exogenous shocks. a more scary factor is that a "hole" in a financial network, i.e. a failed trading partner accelerates loss of confidence. These 2 factors are scary when one realizes the two following factors.
1. Basle II capital accords will force more major market participants towards similar risk models and horizons, thus "tightening the coupling" of the network.
2. The more international the financial markets the less able a major operator such as a central bank to "plug" the occasional hole. If it weren't for the FED during LTCM or the Bank of England during Barings, things could have gotten very nasty indeed.