JUSTIN FOX ~ THE MYTH OF THE RATIONAL MARKET ~ 2009

~ ECF-TCAJOMP-CWC-DOR ~ Early Claims For – The Correctness And Justness Of Market Prices – Came With Caveats – Doses Of Realism

~ T-MOTRM-IIAMOGP-OT-MOTT-ERPW-BIIN-AM-AO-T-WTTL-CLTASOT ~ The – Myth Of The Rational Market – It Is A Myth Of Great Power – One That – Much Of The Time – Explains Reality Pretty Well – But It Is Nonetheless – A Myth – An Oversimplification – That – When Taken Too Literally – Can Lead To All Sorts Of Trouble

~ L-P-I-FIBTMOTW-E-BMAMCW-IWRRO-HB-IOT-BBMO-I ~ Like – Physicists – Ignoring – Friction – In Building Their Models Of The World – Economists – Became More And More Comfortable With – Ignoring Widely Recognized Realities Of – Human Behavior – In Order To – Build Better Models Of – It

~ E-WMAPO-TAW-AF-TR-WDAWTFWT-WF-TIFOTSOEHDC-AAAOTY-MY-JAOO-WFTNLATFWWGO-BABS-E ~ Equations – Were Memorized And Passed On – The Accompanying Words – And Often – The Real-World Data Against Which The Formulas Were Tested – Were Forgotten – This Increasing Focus On The Mathematical Side Of Economics Has Been Decried – Again And Again Over The Years – Mostly By – Journalists And Other Outsiders – Who Found Themselves No Longer Able To Follow What Was Going On – But Also By Some – Economists

~ TWSLOP-IID-WFMHASRV ~ There Were Still Lots Of People – Interested In Debating – Whether Financial Markets Had Any Socially Redeeming Value

~ W-WTS-RWIED-AT-WD ~ We – Want To See – Regular Waves In Economic Data – And Thus – We Do

~ A-NP-HBA-A-TWDWTWWI-WNLW-NLC-NLC-E-BGWTQ-POS-TBTA-RS ~ A – New Paradigm – Had Been Accepted – And – Those Who Didn’t Want To Work Within It – Were No Longer Welcome – No Longer Could – Economists – Be Grouped With Those Quarrelsome – Psychologists Or Sociologists – They Belonged To A – Real Science

~ TS-FS-WCT-YCP-FSPM-BLA-PSPM-WETIT-FSV-CBPBLA-PSV ~ The Same – Finance Scholars – Who Claimed That – You Couldn’t Predict – Future Stock Price Movements – By Looking At – Past Stock Price Movements – Were Embracing The Idea That – Future Stock Volatility – Could Be Predicted By Looking At – Past Stock Volatility

~ ES-TGD-TDRATTFRHD-TRWFIAIWATD-TRTNOFBTCBM ~ Ever Since – The Great Depression – The Dominant Regulatory Approach To Taming Financial Risk Had Been – To Restrict What Financial Institutions And Investors Were Allowed To Do – To Reduce The Number Of Financial Bets That Could Be Made ~ Arguing For – The Freedom To Create Infinite Varieties Of New Financial Instruments – Because – Equilibrium Theory – Said – It Would Bring The Economic World Closer To Perfection

~ D-B-OOTGFSOTNQC-CIAWRABOIO ~ Derivatives – Became – One Of The Great Financial Stories Of The Next Quarter Century – Chronicling It Adequately Would Require A Book Of Its Own

~ IWC-PI-AIWAAT-HA-TROTSM ~ It Was Called – Portfolio Insurance – And It Was An Attempt To – Hedge Away – The Risk Of The Stock Market

~ NN-BTFIWBI-E-IT-1970S-A-EBTSHMSF ~ Human Nature – Begins To Find Its Way Back Into – Economics – In The – 1970s – And – Economists Begin To Study How Markets Sometimes Fail

~ I-IWI-TW-IAMORI-BANT-SAIWHATTSI-A-TCTTSC-W-E-T-UI-O-I-O-B-MCNE ~ If – Information Were Inexpensive – There Would – In A Market Of Rational Investors – Be Almost No Trading – Since All Investors Would Have Access To The Same Information – And – Thus Come To The Same Conclusions – Without – Expensive-To-Unearth Information – Or – Irrationality – Or – Both – Markets Could Not Exist

~ WAOOTM-OTIDSN-A-ATRWPAFR ~ We Are Often Of Two Minds – One That Impatiently Demands Satisfaction Now – And – Another That Rationally Weighs Present And Future Rewards

~ BE ~ Behavioral Economics

~ RWRB-NDM-PCCWTPG-PWMC-EMPC-E-M-PPD-ISOIPAT-ABT-TR-CBMA-MQ-S-R-C-ITO-SCN ~ Regulations Were Rolled Back – New Derivatives Markets – Provided Countless Cheap Ways To Place Bets – Paradise Was Moving Closer – Ever More Powerful Computers – Ever-More-Plentiful Price Data – In Search Of Identifiable Patterns And Trends – A Belief That – The Risks – Could Be Managed – And – Managed Quantitatively – Some – Risks – Could – It Turned Out – Some Could Not

~ TCO-1987-EBFITRFVOR-B-ARB-TFR-AAFR-1987-WT-FAD-O-TIIOMR-MMIF-IWNTBTL ~ The Crash Of – 1987 – Exposes Big Flaws In The Rational Finance View Of Risk – But – A Rescue By – The Federal Reserve – Averts A Full Reexamination – 1987 – Was The – First Alarming Demonstration – Of – The Inherent Instability Of Mathematical Risk-Management Models In Finance – It Was Not To Be The Last

~ IT-WLMADFTS-TTW-TBSB-RO-B-TCWBJF ~ Irrational Traders – Would Lose Money And Disappear From The Scene – The Thinking Went – To Be Supplanted By – Rational Ones – But – This Claim Was Basically Just Folklore

~ G-RLTMEAWS-HI-BFSR-DN ~ Growth – Reached Levels That Many Economists Assumed Would Spark – Higher Inflation – But For Some Reason – Did Not

~ KYCAPOT-A-CUAMYC-IARA-IWE-IFPFTFAPN-M-DF-I-MWW-TMCGI ~ Keep Your Commitments And Promises On Time – And – Clean Up Any Mess You Created – It’s A Reasonable Argument – Incentives Weren’t Enough – If Market Participants Failed To Follow A Particular Non-Market-Determined Norm – Integrity – Markets Wouldn’t Work – The Market Couldn’t Govern Itself

~ AE-GFMBAC-TH-HI-SNFPOT-TMP-WETCO-VUTRO ~ Almost Every – Great Financial Market Bubble And Crash – Through History – Has Involved – Some New Financial Product Or Technology – That Market Participants – Without Experience To Call On – Vastly Underestimate The Risk Of

~ ILUWTNTFWT-TSE-WATWWNBATDSEFAESB-FR-WBPOT-ARO-EAI-WPART-OH-SW-M ~ It Leaves Us With The 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 Part Of That – A Rediscovery Of – Ethics And Integrity – Will Play A Role Too – One Hopes – So Will – Memory