Simplicity on the near side of Complexity is Fools Gold!
WANTED: A New Model for Financial Markets
"Don Putnam, designer of investment products since the 1970's points to the most fundamental of lessons learnt from last years' global financial implosion. "Markets are defined by their participants as much as they are by their mechanics", and it is people's motivations that ultimately count. The car is important but the driver is crucial - and panic among drivers, if you will, makes the technology of the roadways irrelevant, says Putnam. To some that conclusion may seem self-evident. But to accept it sweeps away assumptions that for half a century, it formed the foundation of the financial industry. The reigning theory, often referred to in shorthand as "efficient markets", is deeply embedded in the way that markets operate. The regulations for pension funds and banks both ultimately hinge on these assumptions. So do many law concerning securities fraud. It is central to business schools' curriculum and is part of the Chartered Financial Analyst® qualification that acts as a gateway to the investment profession. Fund managers run their business by comparing their performance against benchmarks indices, another idea from efficient markets. The products based on derivatives that grew notorious for their role in the market crash all stemmed directly from efficient market theory. If the theory needs to be abandoned, the effect on investing will be profound. More important still is what will come to replace it. Efficient markets borrowed from mathematics, but that is now widely regarded as an over simplified and downright misleading theory that fostered the cavalier confidence leading to the crash. Academics are now ransacking a range of other disciplines in a quest for a better understanding. The search has ranged from evolutionary biology through behavioral psychology to thermodynamics and chaos theory. None is likely to deliver answers as clean and simple as those that came from efficient markets."
Hat tip ~ John Authers, Financial Times™, September 28, 2009.
Economics and Business....The last bastions of Modernism...
"I think they are the last bastions of the idea that you can redesign the world in accordance with a rationally designed blueprint. Modernism in the 20th century went through areas such as art, architecture and the humanities with the idea we could rethink everything from the ground up and that we understood enough about the world to do that. I've come to believe that we don't. But people still think they can analyze and structure economies as if they were a mechanical system and that they can do the same in business. So in the same way that Corbusier said - wrongly - that a house is a machine for living in, it exemplifies the idea that a business or a community can be structured from first principles in the same way - And ignores the social context within which economies and businesses work - They are organic entities that evolve over time and operate within a social context. You can't look at them independently of that."
John Kay, British economist, Author