Ángel Cabrera: Global Leaders Can Be Made

Justin Fox‘ latest book, “The myth of the rational market,” tells the fascinating story of the rise and fall of the “efficient market theory”, a twentieth century saga of an elegant mathematical and philosophical contraption turned ideology (if not religion): the idea that markets are always right.

If there were still any doubt, the financial meltdown of 2008 was the latest (and quite painful) proof that investors are a lot less rational that one would think (they overreact or underreact, they are influenced not just by considerations of the assets they trade but by the behavior of the market itself, they tend to discount the distant past and assume that current conditions will be eternal, etc.).  The crisis (which Fox covers, though succinctly, in the epilogue) demonstrates the dangers of perpetuating the myth that markets can somehow filter out human irrationality and be themselves “rational”.

“Where does that leave us? It leaves us with a need to find ways to temper speculative excess while acknowledging that we won’t necessarily be able to distinguish speculative excess from an entirely sustainable boom.  Financial regulation will be a part of that.  A rediscovery of ethics and integrity will play a role too. So will memory…”

To prove the point, Fox points out an idea laid out by Hyman Minsky in the 70’s: that periods of tranquility and financial bonanza lead to a rise in the price of capital assets, a higher tolerance for risk, and the appearance of, surprise!, Ponzi schemes… (there is, after all some science behind Ponzinomics!) I hope to remember this admonition a few years from know, when homes and stocks once again appear to have reached a “permanently high plateau”…

(Justin Fox covered the Thunderbird Oath last May, both in print and video on the web)

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Posted: 08|25|09 at 10:15 pm.
Filed under: Global Mindset.
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