Comment by oersted

> Suppose you have 10 loans and each has a 50% chance of default. Ignore coupon, and say they are $10 each. Expected value is $50

And that naive statistical reasoning is where it goes terribly wrong. You have to consider the causal process that generates that distribution!

The type of people who would default on a coinflip are extremely sensitive to how the economy changes. The probabilities are very correlated, the expected value is rather meaningless then. It's closer to having a 50% chance to either get a full return or get zero returns, depending the macroeconomy, quite the gamble. Actually, those people were in a rather dodgy situation in the first place, or are not great at decision-making, so it might be more like 50% chance either of getting 50% return or getting 0% return.

PS: Just elaborating on your point, not meant as a counterargument, I know you said the same thing.