The broken heart syndrome and the collapse of Wall Street
| The broken heart syndrome also known as “stress cardiomyopathy” is an uncommon disorder most prevalent in older women which strikes after a major mental hardship like the death of a loved one. It appears to involve high circulating levels of catecholamines ( mainly adrenaline and epinephrine ). These patients present with evidence of chest pain and heart failure. However, at cardiac catheterization, the coronary arteries are normal while the apex of the heart is dilated. Assuming they survived the initial event they will often recover completely within approximately 2 months. It is believed that spasms involving the small cardiac vessels may be important factors in its development. In a recent study of 256 cases the patients ranged in age from 30 to 90 with an average age of 69. Most of the affected patients, 81% were postmenopausal women, 11% occurred in men. Only two thirds of the study participants were able to identify a triggering mechanism such as the death of a friend, interpersonal conflict or loss of a job. A recent definitive study showed that in the year following a loved one’s death women were more than twice as likely to die than normal and men more than six times as likely. This had been hinted at in earlier studies as well and insurance companies had already begun taking this into account within actuarial tables. This acute increase in cardiac risk is thought to be due to significant elevations in blood pressure, heart rate, vascular tone, inflammation, and accelerated blood clotting that can be seen with severe emotional distress. Meanwhile, a young graduate student from China named David Li had come to Canada and was working at Waterloo University studying actuarial science. There he developed a mathematical model for the effects of the broken heart syndrome on insurance premiums. After graduation he began working at a Canadian bank where he realized that the new model that he had developed for the broken heart syndrome had a complete analogy with trying to price derivatives for his newly developed packages of mortgages which were being bought and sold. By 2003, his paper had obtained for him a place in Wall Street as the director and global head of derivatives research at Citigroup. In August of 2004, the Moody’s rating agency used his default function formula in its rating methodology for collateralized debt obligations. Unfortunately, Li’s formula did not stand the test when these debt obligations began to fail. The assumptions in the model were incorrect and the subsequent financial collapse is well known to everyone. One must remember that models are based on untested assumptions and this is true especially in finance with its inherent complexity. The finance world got carried away with trying to quantify risk in order to reassure itself that there was less risk than actually existed. On the other hand, men and women under stressful life situations which can lead to the broken heart syndrome need to seek out medical help to cope with these problems as early as possible. They often will deny the risk because they want to believe they can handle it on their own. | ||||||||||||||||||||
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