The rise and fall of Long Term Capital Management

There's this cautionary tale, in the finance world, that nearly any trader can tell you. It's about placing too much confidence in math and models. It's the story of Long Term Capital Management.

The story begins back in the 90s. A group of math nerds figured out how to use a mathematical model to identify opportunities in the market, tiny price discrepancies, that they could bet big on. Those bets turned into big profits, for them and their clients. They were the toast of Wall Street; it looked like they'd solved the puzzle of risk-taking. But their overconfidence in their strategy led to one of the biggest financial implosions in U.S. history, and destabilized the entire market.

On today's show, what happens when perfect math meets the mess of human nature? And what did we learn (and what did we not learn) from the legendary tale of Long Term Capital Management?

This episode of Planet Money was hosted by Mary Childs and Jeff Guo. It was produced by Sam Yellowhorse Kesler and edited by Jess Jiang. It was fact-checked by Sierra Juarez and engineered by Robert Rodriguez. Alex Goldmark is our executive producer.

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