The economic equivalent of the Hubble error

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Remember many years ago that the Hubble space telescope launched and didn’t quite work. It turned out that some scientists confused imperial and metric measurements. That required a costly repair.

The economic equivalent of this would be when you didn’t understand how exchange rates were calculated. For instance, the news in Australia reports the US dollar exchange rate at 1.0645 (which has the convenient interpretation that up is good). The US media report the same exchange rate the same way which, of course, has the opposite interpretation from the US perspective (up is supposedly bad). For anyone dealing with exchange rates it is critical to know which way is up.

Apparently, for Goldman Sachs, this has created a problem. They wanted to create a Nikkei warrant based on:

(Closing Level – Strike Level) x Index Currency Amount / Exchange Rate

But ended up with one based on this:

(Closing Level – Strike Level) x Index Currency Amount x Exchange Rate

Oops. If the exchange rate interpretation changes, both are equivalent but if not there is a problem. It turned out that for Goldman Sachs the adjustments were not made.

And the cost of failing International Economics 101? HK$350m which is A$41m or A$2.8b depending on how you calculate it.

4 Responses to "The economic equivalent of the Hubble error"
  1. The problem with the Hubble was that the most-precisely ground and polished mirror ever was ground and polished … into the wrong shape.

    In the Mars Climate Orbiter example, the lessons are about communication between different teams — both between people and programs (intelligent use of type systems would have rendered the MCO error visible before launch).

    The Hubble lesson demonstrates, like this blog post, how a small mistake can turn into a massively expensive mistake.

  2. Mars Climate Orbiter was where society paid yet again for using a ridiculous unit of measure.  Milli-bushels of forces per micro-furlong perhaps?

    The problem with Hubble was there was no quality double-check on the manufacturing of the mirror – the tool used to make the mirror was used to check the mirror, which was mis-focused.

    ‘Bad’ is a loaded word, and in the eye of the beholder.  If other countries are willing to sell Australians manufactured goods super cheap, they are less willing to pay so much for our unprocessed resources and access to our wonderful weather.

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