Why Markets are Flawed
Just a note for myself really (can't imagine anyone else here being interested in economics...)
The Market Hypothesis ( http://en.wikipedia.org/wiki/Efficient-market_hypothesis ) is a cornerstone of Capitalism, but it's ideologically flawed.
People are sheep - they follow each other. What's more, the ones who aren't sheep who should be asking "what is the true value" of some company or other, are actually asking "what are the sheep going to do". When bubbles form they are propelled even by those who can see it is a bubble. They buy even if they believe the stock to be already overvalued - if they believe others will be suckered into it for some time yet - it's all about getting out in time.
The market is beginning to understand - the FT Weekend frontpage confirmed this in UK Hedge Funds Make Millions From Betting On Decline In Value Of Sterling where it says : "The 3 hedge funds - which are the 1st, 2nd and 4th largest in Europe... do not take an active view on Sterling's fundamental worth. They use computer models to identify trends and follow them in trades that typically last several months." What happens when everyone is using computer models to see what everyone else is doing? The market becomes chaotic, based on hot air - or whatever the new tailors in town say is the emporer's new clothes (which is precisely what happened with the Dot Com bubble).
Note however that this recognition is disconnected from the reality of big bonuses and the continuing conspicuous narcissism of those involved in trading. They will ride it (with our money) as long as the train keeps running - then retire with handsome cheques / wives / sports cars / chalets, arrogance dented but still intact.
The whole idea that they should all get paid so much because of their "incredible insight" is a joke. In it's failure to recognise how humans act, the market hypothesis is fundamentally flawed and with it Capitalism in the long term is doomed to go the way of all the other great empires of history.
The Market Hypothesis ( http://en.wikipedia.org/wiki/Efficient-market_hypothesis ) is a cornerstone of Capitalism, but it's ideologically flawed.
People are sheep - they follow each other. What's more, the ones who aren't sheep who should be asking "what is the true value" of some company or other, are actually asking "what are the sheep going to do". When bubbles form they are propelled even by those who can see it is a bubble. They buy even if they believe the stock to be already overvalued - if they believe others will be suckered into it for some time yet - it's all about getting out in time.
The market is beginning to understand - the FT Weekend frontpage confirmed this in UK Hedge Funds Make Millions From Betting On Decline In Value Of Sterling where it says : "The 3 hedge funds - which are the 1st, 2nd and 4th largest in Europe... do not take an active view on Sterling's fundamental worth. They use computer models to identify trends and follow them in trades that typically last several months." What happens when everyone is using computer models to see what everyone else is doing? The market becomes chaotic, based on hot air - or whatever the new tailors in town say is the emporer's new clothes (which is precisely what happened with the Dot Com bubble).
Note however that this recognition is disconnected from the reality of big bonuses and the continuing conspicuous narcissism of those involved in trading. They will ride it (with our money) as long as the train keeps running - then retire with handsome cheques / wives / sports cars / chalets, arrogance dented but still intact.
The whole idea that they should all get paid so much because of their "incredible insight" is a joke. In it's failure to recognise how humans act, the market hypothesis is fundamentally flawed and with it Capitalism in the long term is doomed to go the way of all the other great empires of history.
Comments