why crisis comes in to existence??

first problem- mathematical error

because we generally assume that 9.9999 = 10 or as we know that mathematical its possible to prove in this way..

x= 9.9999

10 x=99.9999

9x= 90

x=10

mathematical flaw...

so this small flaw can be a reason of crisis because when we neglect this flaw and think that there is no need to consider .ooooooooooooo1(aprrox.)(again its a flaw). but when dealing becomes hefty then this small approximations does matter. let's say we are dealing in 100 trillions of rupees. if we don't consider this then u can loss some millions.....

so it does matter..

look at this one..( from economics point of view what i have  researched till now)

Example

The market rate of return on the 4.25% govt. bond maturing on 7 March 2036 is currently 3.81% per annum. Let's assume that this can be broken down into a real rate of exactly 2% and an inflation premium of 1.775% (no premium for risk, as government bond is considered to be "risk-free"):

1.02 x 1.01775 = 1.0381

you can ignore the third term (0.02 x 0.01775 = 0.00035 or 0.035%) and just call the nominal rate of return 3.775%, on the grounds that that is almost the same as 3.81%.

nominal rate= real rate + inflation

3.775= 2+1.775

At a nominal rate of return of 3.81% pa, the value of the bond is rs.107.84 per 100 nominal. At a rate of return of 3.775% pa, the value is rs.108.50 per 100 nominal, or 66p more.

The average size of actual transactions in this bond in the market in the final quarter of 2007 was rs. 400 million. So a difference in price of 66p per 100 translates into a difference of 26,40,000 per deal.

on more problem is we have taken lots of assumption n approximations..

so second problem is which variables we have to take as decison variables.( others will be left as constant).

if we take CAPM model, look it carefully which says that-

cost of capital = rf + b(km - rf) ( sorry if there is any problem in formaulla, does not matter)

 linear equation based risk engeering model..

which means if marketing returns increase i.e. km then cost of capital also increase which means expectation also increase. so it means continous growth.. if we consider stock market then it will move like 10 k to 12 k in one month then 12k - 14 k and so on... but is it really possible... think logically

so can we make a prefect model on nonlinear basis??

 no we can never make a prefect model but we can make a good model which better directs banks , investment companies even to governments... 

first we have to indentify all the factors which are important..

that's what we discussed in class...

but think one step ahead..

while creating models, did economists, reseach engineers nvr thought abt imp. variables...

yes they did...( they are not as fool as we are thinking)

but wot's the problem??

"dynamic environment" 

acc. to change in environment we have to make changes in models, again is it possible ansd up to wot extent..( kehna assan hota hai yarr) but if u have a passion then u can do it..

make a model for SEBI which will make sensex, nifty less riskier then foriegn markets... is it possible???

dn't have enough time to write more in bad english...

 so think yourself

(play with psychology)

let me think...