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Models pose a paradox. They hold the key to extraordinary profits but can inflict destructive losses on a bank. Because a model entails a complex perspective on issues that are typically fuzzy and ambiguous, they can lock traders into a mistaken view of the world, leading to billionaire losses. Can banks reap the benefits of models while avoiding their accompanying dangers? The research suggests they do, and shows how. A sociological study has been conducted of a derivatives trading room at a large bank on Wall Street. The bank, which remained anonymous in this study, reaped extraordinary profits from its models - but emerged from the credit crisis unscathed.
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