The spectacular implosion of Long Term Capital Management in 1998 has come to symbolise the perils of excessive speculation.

The causes of the hedge fund's collapse, though, are widely misunderstood, says Robert Merton. While some observers blamed events on the faith that the fund placed in financial models - founded on a belief in rational markets - Prof Merton says the real problem was the way that LTCM's counterparties behaved.