Monday, September 28, 2009

Fooled by Randomness

"Hysteria seems especially out of place when people proclaim that the large losses triggered by derivatives could threaten the stability of the world financial system. While enormous leverage and extraordinary potential losses from derivatives will continue to receive banner headlines, a number of international study groups have concluded that a spreading worldwide financial crisis caused by derivatives is highly unlikely. Speculators who take large risks will continue to risk ruin, and some financial institutions -- even large ones -- will continue to fail. But a systematic undermining of world financial stability caused by derivatives trading does not deserve to be on the top of anyone's worry list." -- Burton G. Malkiel, A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, p. 415, 2007 (revised and updated, but not updated quite enough)

3 comments:

Brenda Rosser said...

"a number of international study groups have concluded that a spreading worldwide financial crisis caused by derivatives is highly unlikely. . ."

Were they study groups established by - and paid for by - the US Fed and the US Treasury??

Want a particular conclusion? Pay for a study group. Better still, say that study groups exist and claim that they have arrived at the precise conclusion you want. No traceable references required in your article because most readers are gullible and will never demand such things.

Who published this???

rosserjb@jmu.edu said...

I am not sure about this revised edition, but the first one was published by Princeton University Press back in the 1970s. Malkiel is indeed the economist who popularized the concept of the "random walk hypothesis" in that book, which is an implication of the efficient markets hypothesis as formulated a few years earlier by Eugene Fama.

What is hilarious in the runup to the next Nobel Prize is that there are still people pumping for Fama to get it. Maybe he will some day, but no way this year after his most famous argument has just fallen down into disastrous ridicule in the face of real world events over the last couple of years.

Personally, I think that the field most likely to get it this year is environmental economics, both because it has never gotten one and also because of the upcoming Copenhagen summit on global warming, which is near Sweden, and the Swedes are very supportive. Who might be the actual recipient or recipients if this happens? Well, there is a long list of potential ones. But this is not a hard forecast, could easily go to some other field or one of several senior and worthy individuals.

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