Boon's Basement

“How maths killed Lehman Brothers” – Horatio Boedihardjo

// June 30th, 2009 // News, Thoughts

Suffering from jet lag, I was browsing digg.com at 4.30am in the morning when I stumbled upon this interesting article written by Horatio Boediharjo, who is currently 19 and is studying for his Doctorate in probability at Oxford University. Horatio’s article, which highlighted the events and factors, with subtle sarcasm and wit, that drove the nails to the coffin for Lehman Brothers, is published at + Plus Magazine (http://plus.math.org).  Horatio was awarded the Plus new writers award 2009 under University Category for this piece .

Below is an excerpt from Horatio’s article and you can read the award winning piece here.

“Whether you can make money from selling the CDO insurance for the bank depends on whether the borrowers return the money, which in turns depends on the economy. So if the economy goes down, you are a lot more likely to lose money. If you are an active investor, then you probably have invested in the stock market as well. Now if the market crashes you lose both the money invested in the stock market and in the CDO. Suppose, on the other hand, that instead of spending the money on CDO, you bet on whether Manchester United will win the European Champion League. This time in order to lose all your money you need both the market to go down and Manchester United to lose their match — this is less likely than just having the market go down. Therefore, investing on CDO is a riskier choice than betting for Manchester United. The error in our model is that we have not taken into account this extra risk due to its dependence of CDO on the market.”

-Boon