Saturday, March 15, 2008

Know Thy Purchase

The Oracle at Delphi that the Greek revered once famously exhorted seekers of wisdom: "Know thyself.

It has many profound implications since knowing oneself fully will enable us to understand other human more, people have much more in common than in contrast. Thus enable us to getting a closer glimpse on our place in the universe and, if you subscribe to the notion, thy maker.

Compare to that, the title of this post is disappointingly simple. If you know what you buy, then… . you know the value of what you buy and whether you are paying too much or too little. Is that it?

But that’s it!

But surprisingly smart people at hot shot company seem not to get it. Bear Stern, one of the largest financial companies on Wall Street, has followed (read article here) Citigroup and Merrill Lynch into financial debacle due to subprime mortgage over exposure.

Why? The so-called innovation in financial instrument has sliced and diced numerous kinds of asset back securities including house/apartment mortgage with non-negligible risk of default, thus the name sub prime (more detailed explanation here), with other more credit worthy assets.

But it becoming so complex with low disclosure requirement that the buyer don’t really know what’s behind their peace of paper that they bought.

Add the concept of self serving bias and herd behavior in behavioral economics. If other smart and rich people are buying the exotic (read: I don’t really understand it but other smart and rich people are doing it) financial instrument. Which one is more psychologically comforting? To check carefully whether smart adn rich peoples made a mistake and risk ridicules or proclaimed that “we get it” and get acceptance to the fancy club?

Sadly, the second options were in the majority.

And now the trusts are shaken and the lies exposed. It takes more than word of US Finance Minister (read his statement yesterday here) to calm the market. As any couple would know, it takes a lot to solved long ignored problem (click here). It takes sincere apology, full disclosure and strict rule not repeat it again. It means tight regulation and information availability. More promises unkept could only lead to more disaster ahead.

So much trouble for such a simple thing not done. Know thy purchase.


If you are in blue over the subprime. Watch subprime mortgage blues at Greg Mankie’s blog here

1 comment:

fajar said...

salam kenal