LESSONS: BEWARE USING ONLY ONE NUMBER.

LESSONS: BEWARE USING ONLY ONE NUMBER. Kids, I keep trying to identify lessons from the financial crisis that will apply down the road. Some of the particular follies that have happened will never be seen again; they will be replaced by similar follies. When I was taking accounting in law school, I was puzzled by the emphasis on rules relating to income per share. My naive reaction was that if the information or explanation was footnoted, that people would look at the entire picture. Over time, I learned that people do simplify in analyzing problems, such as evaluating prices of shares of stock. (Think of the single number as a sound bite). One of the appeals of the complicated formula that I posted on yesterday was that the mathematician “didn’t just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. …. Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.”