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The “peak end” rule factor is very dangerous. It fools us into interpreting ex post risks as ex ante risks.

Saturday, May 28, 2016 14:25

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Sir, Tim Harford writes about “How the sense of an ending shapes memory” May 28

In it Harford refers to the “peak-end rule” that arose from a 1993 study titled “When More Pain Is Preferred to Less: Adding a Better End” by Daniel Kahneman, Barbara Fredrickson, Charles Schreiber, and Donald Redelmeier.

That rule also points like at us remembering more the status found at the end, the ex post, than the one existing at the beginning, the ex ante.

At the end of a bank crisis, many bank borrowers might appear with a Below BB- rating. And therefore this “peak-end” rule might explain, why regulators awarded the below BB- rated a 150 percent risk weight.

That is so tragically dumb, since the banks would never ever have created, ex ante, the dangerous excessive bank exposures to below BB-rated.

Those were more likely to have happened, and are much more likely to happen, with the AAA to AA rated; those awarded a meager 20 percent risk weight.

@PerKurowski ©

Source: http://teawithft.blogspot.com/2016/05/the-peak-end-rule-factor-is-very.html

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