The blogosphere is reporting on a new paper coming out of Princeton that applies computer science theory to the field of financial derivatives. The Daily Kos summarizes the paper’s fairly astounding findings thusly:

"Scientists have proved that it is possible to create complex financial bundles (you know – bundles of mortgages that have ‘a few lemons’ that are supposed to average out and make the whole bundle great investment) that hide bad assets in such a way that no computer or human can detect the bad assets."

Worse, the blog continues, "Even after a buyer loses their shirt on the investment, it is impossible for the buyer to prove that they were sold junk, which makes it impossible to regulate."

The paper is Computational Complexity and Information Asymmetry in Financial Products by Sanjeev Arora, Boaz Barak, Markus Brunnermeier, and Rong Ge. Arora and Barak are with Princeton’s Center for Computational Intractability and coauthors of Computational Complexity: A Modern Approach, published earlier this year by Cambridge University Press.

Read the full blog commentary on the Daily Kos, Boingboing, Freedom to Tinker, Gödel’s Lost Letter and In Theory.

 
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