RE: [OPE] The micro dimension of the Financial Crisis.

 Alexandro
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3) PRESCRIPTIVE/MANDATORY MODELS: this is the nature of the models behind the "derivatives" that caused the financial crisis. Why they failed? Because mathematics only can deal with classical environments characterized by: A) absence of externalities, B) absence of local saturation of preferences, C) total divisibility of factors of production, D) convexity or absence of increasing returns to scale, and E) temporal homogeneity.

Paul

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That sounds too much like neo-classical economics to be plausible for the maths used to price derivatives and
bundles of debt. I had assumed that what they did was based much more soundly on classical probability theory
with little reference to factors of production, returns to scale etc. Remember this was a purely financial
set of calculations not touching on commodity production at all.
  

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