Well, it was a dumb question but I don’t know then why every journalist and research papers keep asking the question:
How did the bank executives takes so much risk and were disconnected with the risk reward relationship?
I have a simple answer, they are HUMAN and we are wired to miscalculate risk, read the work of Daniel Kahenman & Amos Tverskey and Dan Gilbert… they have proved that everyone, I mean everyone of us has what they termed as Heuristics and Biases. Heuristics are something like a short cut and bias is of course Bias. We tend to make decisions based on our Heuristics and our biases, there is no complicated risk reward equation involved in dealing with the decisions the executives of the banks were making. Well, how did they get this right before… simple, they got lucky! period!
