“At Oaktree, we believe that because there’s so much we can’t know about the future, we should invest only where our analysis tells us the worst case is tolerable.” — Howard Marks, memo to clients (pdf) dated March 11, 2003.
The latest issue of The Economist magazine includes a special report on financial risk. The videographic shown below illustrates the manner in which banks (and others) misread financial risks in the period leading up to the crisis. The assumption that financial assets would adhere to a normal distribution, or bell curve, proved to be false and the distribution had fatter tails than models had predicted. The videographic is a well illustrated basic account of this fundamental misreading of financial risk in recent years. Read this article for more details.