Talk to Me Like I'm Stupider

More

Our first Talk To Me Like I'm Stupid thread turned out really well. There are some great answers in there. To highlight a few really knowledgeable one's, I thought Sf45, Cynic, and Pacal-Emmanuel Gobry offered some really helpful answers. But my favorite came from Darius Tahir. I thought the following should be the first thing out of anyone's mouth whenever someone says, "What the hell is a derivative?"


A while back me and my buddies were playing poker. I got to the game late so there wasn't a spot for me (the game was capped at eight people). So one of the players was playing absolutely awful and losing a ton of cash. I turn to another guy who wasn't playing and said, I bet he'll be the first out. So we made a bet on it (mostly for sport). 

So, if poker were finance, here's how it would be: the poker players are investing straightforwardly in stocks and bonds and what have you. They're investing in an asset directly. I'm investing in a derivative: my bet is derived from the standing of someone else.

Darius, you can shoot me an e-mail and we'll get you on for that guest post.

I'd like to follow up just to make sure I'm getting the housing portion of this conversation. Credit default swaps allowed lenders to defray the risk for home loan defaulting. These swaps were then bundled and sold. The value was based (1.) on the quality of loans (2.) And the fact that it was highly unlikely that the entire bundle would default, much less a critical mass of bundles. But the ability to bundle the swaps made it easier to loan, thus changing the profile of the borrowers. This meant the data was useless, and a crash (though no one knew when) was almost certain.

Do I have that right? 

We'll have another question for Tuesday.
Jump to comments

Ta-Nehisi Coates is a national correspondent at The Atlantic, where he writes about culture, politics, and social issues. He is the author of the memoir The Beautiful Struggle.

Get Today's Top Stories in Your Inbox (preview)

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity

Video

Is Technology Making Us Better Storytellers?

The minds behind House of Cards and The Moth weigh in.

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

From This Author