Lanchester Explains Derivatives

A surprising number of visitors to this blog are drawn by a post from last June: Mortgage Derivatives Explained. The post links to a whimsical poem by Shel Silverstein – enlightening, but probably lacking the information the visitor seeks.

Here's a better bet: Melting into Air, John Lanchester's New Yorker article, explains the abstractions known as derivatives and why we are not meant to understand them:

[F]inance, like other forms of human behavior, underwent a change in the twentieth century, a shift equivalent to the emergence of modernism in the arts—a break with common sense, a turn toward self-referentiality and abstraction and notions that couldn’t be explained in workaday English. In poetry, this moment took place with the publication of “The Waste Land.” In classical music, it was, perhaps, the première of “The Rite of Spring.” Jazz, dance, architecture, painting—all had comparable moments. The moment in finance came in 1973, with the publication of a paper in the Journal of Political Economy titled “The Pricing of Options and Corporate Liabilities,” by Fischer Black and Myron Scholes.

Lanchester points out that some people did foresee the collapse of the "financial economy." They even wrote books about it.