Nobel Laureate Robert Shiller - The Mirage of the
Financial Singularity:
Shiller observes:
“Markets seem to be
driven by stories, as I emphasize in my book Irrational Exuberance. There are
stories of great new eras and of looming depressions. There are fundamental
stories about technology and declining resources. And there are stories about
politics and bizarre conspiracies. No one knows if
these stories are true, but they take on a life of their own. Sometimes they go
viral. When one has a heart-to-heart talk with many seemingly rational people,
they turn out to have crazy theories. These people influence markets, because
all other investors must reckon with them; and their craziness is not going
away anytime soon.”
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Richard Thaler on Keynes and Financial Markets:
Keynes had a very keen and
sophisticated understanding of financial markets. Thaler notes:
“Keynes thought
markets had been more “efficient” at the beginning of the 20th century, when
managers owned most of the shares in a company and knew what it was worth. As
shares became more widely dispersed, “the element of real knowledge in the
valuation of investments by those who own them or contemplate purchasing
them . . . seriously declined”. By the time of The
General Theory, Keynes had concluded that markets had gone crazy. “Day-to-day
fluctuations in the profits of existing investments, which are obviously of an
ephemeral and non-significant character, tend to have an altogether excessive,
and even an absurd, influence on the market.””
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Why Investing Is So Complicated, and How to Make It
Simpler by By SENDHIL MULLAINATHAN
Harvard economist Mullainathan observes:
“What distinguishes the market for investments is our
inability to judge whether we have chosen well. Once I’ve used a phone for a
few weeks, I can tell whether it was worth the money. By contrast, I may not
know for decades (if ever) whether an investment was wise or foolish. Does a
low return signal a prudent choice or a missed opportunity? And by the time the
answer becomes clear, it’s already too late. You’ve got to live with your bad
choice. What’s more, the invisible hand of competition does
not do well by consumers with limited understanding. Rather than eliminating
biases, markets often cater to them. For example, many consumers choose a mutual
fund by looking at last year’s returns, despite warnings that they should not
do so. This creates a winner-take-all situation with the highest-performing
funds getting most of the investors. You might think this encourages funds to
produce higher returns, and that might seem to be a good thing.”