One book I would wholeheartedly recommend to anyone having serious problems with mainstream financial theory and more generally with what is known as neo-classical economics but needing a new conceptual framework to work with is The Origin of Wealth (Evolution, Complexity, and the Radical Remaking of Economics) by Eric Beinhocker.
Excerpt:
"First, a substantial body of empirical and experimental evidence shows that real-world investors look nothing like their theoretical, perfectly rational counterparts. Investors do not discount in the way traditional theory assumes; they have various biases regarding risk, are subject to framing errors in processing information, and use heuristics to make decisions. (....)
Second, Bachelier was wrong. Markets do not follow a random walk. (...)"
Regarding this last point, I've already mentioned the work of Andrew Lo from MIT. Beinhocker goes deeper in presenting Lo's incessant work since his seminal 1986 paper (Lo, MacKinlay) to convince the remaining die-hard random walkers of what even Burton Malkiel has admitted in the seventh edition of his classic A Random Walk Down Wall Street: that markets do not, in fact, follow a random walk.
Beinhocker goes on to introduce a new paradigm much more adept at modelling the financial markets: the markets as adaptive evolving ecosystems.
The tools and science of evolution and biology (and more generally of complex adaptive systems) are found to be a much better conceptual and theoretical fit when it comes to markets than those of equilibrium physics.
More on that in a later post.
4 comments:
Dude - THIs is an excellent f#cking post.
I am dead serious.
Thank you for turning me on to this book.
Yeah, whatever bro.
If you're for real, hope you enjoy it.
Seldom seem but often felt, is that it?
I am for real. Sorry if the exuburance came across as sacarsm. Blame it on the Jim Beam. Which was needed to get me through a dreadfully boring social engagement. I was very happy to see your post - especially after an evening of vapid yak yak.
Anyway, I have a cross country flight next week - I'm hoping the good folks at Amazon.com can hook me up with a timely delivery before I go.
Seldom seen but often felt? That is the idea. But execution is another issue. I still need a lot of work on my astral projection skills.
:-)
Keep up the good work with the blog.
Thanks seldomseen.
I recently had a brush with a nasty commenter so I'm a tad suspicious. Sorry about that.
Anyway, the book should definitely make your flight more bearable.
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