The Danger Hiding in Complexity

Here's a familiar financial recipe ...

  • Take one complicated investment with pricing few people really understand
  • Add a dollop of initial profits
  • Let trading stew until investor interest rises, forming bubble.
  • Wait for bubble to pop.

This recipe has worked from the time of tulip bulbs. And now it is at work again, albeit in a fairly small form.

It concerns an Exchange Traded Note...a debt-based cousin of the Exchange Traded Fund...commonly called the TVIX. It's been exceptionally volatile of late, as noted by our Jeff Cox in a recent piece.

Pando Hall | Digital Vision | Getty Images

Resident stock commentator Herb Greenberg has also focused on it, not only pointing out its inherent dangers for unsuspecting investors, but also flagging the lack of interest on the part of the SEC to do much about it. (Although it looks like that might be changing. This comes after Herb made a fuss about it on air).

Regardless of whether it's the TVIX or some other security, it's the pattern we should find really disturbing: Complexity seems to blind investors to risk.

Think about collaterallized debt obligations and credit default swaps. People are fairly familiar with them today, but only because they brought the financial world to the brink in 2008. You don't want to find out how dangerous something is AFTER you've already played with it.

Check out Jeff and Herb's work, and keep your eyes open.


Allen Wastler is managing editor of Follow him on Twitter @AWastler. You can catch his commentary on CNBC Radio. And check out his fiction.