Constrained Bliss Point

Not to be alarmist or anything, but Free and Open Source Software (FOSS) is probably to blame in bringing the global financial system to its knees. A few months ago I came across an intriguing article in the New York Times about fat tails and gaussian copulas. It was a pretty good piece, worth at least a glance.

The interesting part begins on page six. Long story short, JPMorgan developed a way of using maths to quantify financial risk into a dollar value. Value at Risk, or VaR, as it was abbreviated, was a useful tool internal to JPMorgan. Then they did something totally bonkers: they gave VaR away. Anyone who wanted to learn and implement VaR could do it, and JPMorgan would help you out. Why would they just give away such a valuable piece of proprietary technology? This quote sums it up nicely:

As Guldimann wrote years later, “Many wondered what the bank was trying to accomplish by giving away ‘proprietary’ methodologies and lots of data, but not selling any products or services.” He continued, “It popularized a methodology and made it a market standard, and it enhanced the image of JPMorgan.”

The story ends with a score of financial firms coming to rely too heavily on VaR, then they overextend themselves, get lulled into a false sense of security, and finally fat tails come in and kick everyone’s asses. Also the economy exploded.

I can’t help but wonder if it was the tactically-superior give-it-away model of FOSS that allowed JPMorgan’s mathematical monstrosity to consume the world’s financial sector in a blaze of nihilist glory.