A movie with a lesson about the financial world in the middle of it?
Adam McKay, the director of The Big Short, just did that.
Actress Selena Gomez sits at a blackjack table. People holding martinis are standing behind her.
Gomez is dealt a good hand and places a bet of 10 million dollar.
This 10 million represents a set of mortgages. It’s called a mortgage bond.
The people standing behind Gomez are also betting – on the outcome of Gomez’s bet.
‘I love Selena Gomez. I bet you 50 million she wins,’ says a woman with glasses. A man in a suit accepts the bet.
This bet about a bet is analogous to a synthetic CDO. Synthetic CDO’s played a big role in the 2008 financial crisis.
Behind the woman with glasses stands a man with a beard. He bets 200 million that the woman with glasses wins the bet. Synthetic CDO number 2.
A bet about a bet about a bet.
The casino is packed, so even more synthetic CDO’s are created. Eventually, people are betting billions of dollars. And the amounts and odds are far removed from the original blackjack hand – from the real economy.
Want to explain an abstract, theoretical concept? An analogy with something that your audience is familiar with can make a big difference.
Regards,
Arnaud
PS The Big Short offers more inspiration for making abstract topics concrete: the Jenga scene.