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Long Term Capital Management (LTCM) was a hedge fund that lost billions of dollars because its founders, including nobel prize winners, assumed 1) things that have been uncorrelated for a while will remain uncorrelated, and 2) ridiculously low probabilities of failure calculated from assumptions that events are distributed normally actually apply to analyzing the likelihood of various disastrous investment strategies failing. That is, LTCM reported results as if something which is seen from data to be normal between +/- 2*sigma will be reliably normal out to 3, 4, 5, and 6 sigma.
Yes, there WERE people who knew LTCM were morons. But there were plenty who didn't, including nobel prize winners with PhDs. It really happened and it still really happens.
I am familiar with LTCM and how it crashed and burned. I don't think that people who ran it were morons or that they assumed returns will be normally distributed. LTCM's blowup is a prime example of "Markets can stay irrational longer than you can stay solvent" (which should be an interesting lesson for LW people who are convinced markets are efficient).
LTCM failed when its convergence trades (which did NOT assume things will be uncorrelated or that returns will be Gaussian) diverged instead and LTCM could not meet margin calls.
Hindsight vision makes everything easy. Perhaps you'd like to point out today some obvious to you morons who didn't blow up yet but certainly will?