The Charge of the Light Brigade

Half a league, half a league,

Half a league onward,
All in the valley of Death
Rode the six hundred.
"Forward, the Light Brigade!
Charge for the guns!" he said:
Into the valley of Death
Rode the six hundred.

My guess is that at some point while reading that you realized that you have hear it before.  It is the first stanza of Alfred Lord Tennyson’s poem “The Charge of the Light Brigade.  If it stopped there, you may well expect that this is the prelude to what is to be the account of a glorious victory on the battlefield, it certainly sets the stage for such.  History, however remembers this charge in a different way.

"Forward, the Light Brigade!"
Was there a man dismay’d?
Not tho’ the soldier knew
Some one had blunder’d:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do and die:
Into the valley of Death
Rode the six hundred.

Did you catch that line?  Someone had blundered.  And they had blundered badly.  Lord Raglan, the commander over the battle had never intended to send the light brigade into the valley of death.  They were supposed to ride along the top of the valley of death in order to prevent the Russians from removing captured guns.  That was a task for which light cavalry would have been well suited.  Charging through the middle of the valley, was not.

Cannon to right of them,
Cannon to left of them,
Cannon behind them
Volley’d and thunder’d;
Storm’d at with shot and shell,
While horse and hero fell,
They that had fought so well
Came thro’ the jaws of Death,
Back from the mouth of Hell,
All that was left of them,
Left of six hundred.

After retreating and regrouping.  195 men were still left with horses.  And they had accomplished, absolutely nothing.  We must remember that these cere career military men.   They were accustomed to following orders and trusting command implicitly.  In the end it turned out to be that implicit trust, in a blundered communication that led to one of the worst defeats in British military history.

For those reading who had investments and retirement accounts in 2008, you may have felt as though the years of 2008-2010 were a metaphorical financial valley of death that you had been sent charging though.  Your losses, while not in human life, were probably quite similar.  Your destination (at least it seemed at the time) was nowhere.  Would you be shocked to know that a good portion of that pain felt in 2008 was also caused by implicit trust, in bad information.

That implicit trust was of course not placed in a general, but in a formula.  Known as the Gaussian copula.  Which has later become known as the formula that destroyed Wall Street.  The Gaussian copula is a formula used to predict and model risk.  Specifically, correlation of risks.  For decades, it did its job admirably.  In fact it did its job so well, that Wall Street analysts began to trust it more and more.  It was adopted by everybody from bond traders to ratings agencies and regulators.  It became so widely accepted, that the warning signs about its limitations went ignored. 

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

-        Joe Cassano, AIG

That quote is from Joe Cassano in regard to the credit swap activity that AIG had been so widely involved in in the early 2000’s.  Credit swaps that had profited the firm billions.  The reason for his confidence, was the Gaussian copula.  The result of his trust in the formula?  AIG turned out to be the most heavily intertwined player in the entire financial crisis, with losses totaling just shy of 100 billion when all was said and done.  

The point of all of this is not to convince you that the real culprit behind the financial crisis was a formula.  It was not.  It was the greed and short sightedness of Wall Street firms who still to this day have never paid the price. 

It is also not to make you think you need to mistrust every bit of information you come across.  When it comes to the financial world, none of us have enough time in the day to fully vet every opportunity that comes our way.  What you can do is take strides to make sure you are not putting all of your eggs into the same basket.  In particular, making sure your baskets are actually different, not just looking different.

A frequent thing I see is an investment portfolio that someone was told is very well diversified because it has 12 different funds in it.  But what they don’t see until they look closer is that all of those funds are almost the same.  Take some time to look through your own financial life, and make sure you aren’t trusting too much in what may be bad information.  If you don’t have the time to do it yourself, consider hiring someone to do it for you.