Unmissable by way of Money Science, how the financial crisis emerged from an industry of business and finance that actively recruits social psychopaths due to their superior skills in morally unconstrained decision making. The original article is an essay by my fellow Bloomberg columnist William Cohan: It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the...

I've written quite a bit about the shortcomings of traditional economic models of markets. Most notably, such models -- typically characterized by rational agents the actions of whom lead (by assumption) to a market equilibrium of some sort -- generally fail to explain basic dynamical features of real markets. These include, most prominently, 1) a pronounced tendency in all markets to large price fluctuations reflected in "fat tailed" distributions of returns, and 2) vigorous and persistent...

I've been doing some background reading on rationality in economics, and came across this fairly unique perspective offered by economist Duncan Foley. It's from 2003. What sets it apart from most other reviews of the role of the rationality assumption in economics, is that Foley tries to trace the history of this approach as it emerged out of the tradition of Hobbes and Locke in political philosophy. As Foley notes, the idea of rationality is in many ways beyond question for most economists,...

I highly recommend this essay by computer scientist Dave Cliff on the complexity of today's global markets, their inherent dependence on technology and potential for catastrophic breakdown. This is based on a presentation he made to the UK government not long after the Flash Crash of 6 May 2010. He offers a valuable perspective as someone who has been both closely involved with developing automated trading algorithms, and thought a great deal about the stability and potential for breakdown in...

What does the (tentatively discovered) Higgs Boson have to do with finance? Nothing. At least nothing obvious. Still, it's a fascinating topic with grand sweeping themes. I've written an essay on it for Bloomberg Views, which will appear later tonight or tomorrow. I'll add the link when it does. The interesting thing to me about the Higgs Boson, and the associated Higgs field (the boson is an elementary excitation of this field), is the intellectual or conceptual history of the idea. It seems...

I wanted to respond to several insightful comments on my recent post on power laws in finance. And, after that, pose a question on the economics/finance history of financial time series that I hope someone out there might be able to help me with. First, comments: ivansml said... Why exactly is power-law distribution for asset returns inconsistent with EMH? It is trivial to write "standard" economic model where returns have fat tails, e.g. if we assume that stochastic process for dividends ...

By way of Simolean Sense: The following is a script of "Prosecuting Wall Street" (CBS) which aired on Dec. 4, 2011. Steve Kroft is correspondent, James Jacoby, producer. It's been three years since the financial crisis crippled the American economy, and much to the consternation of the general public and the demonstrators on Wall Street, there has not been a single prosecution of a high-ranking Wall Street executive or major financial firm even though fraud and financial...

My latest column in Bloomberg looks very briefly at some of the basic mathematical patterns we know about in finance. Science has a long tradition of putting data and observation first. Look very carefully at what needs to be explained -- mathematical patterns that show up consistently in the data -- and then try to build simple models able to reproduce those patterns in a natural way. This path has great promise in economic finance, although it hasn't been pursued very far until recently. My...

Dave Cliff of the University of Bristol is someone whose work I've been meaning to look at much more closely for a long time. Essentially he's an artificial intelligence expert, but has has devoted some of his work to developing trading algorithms. He suggests that many of these algorithms, even one working on extremely simple rules, consistently outperform human beings, which rather undermines the common economic view that people are highly sophisticated rational agents. I just noticed tht...

I wrote a post a while back exploring some of the silliest things economists were saying before the crisis about how financial engineering was making our economy more robust, stable, efficient, wonderful, beautiful, intelligent, self-regulating, and so on. The markets were, R. Glenn Hubbard and William Dudley were convinced, even leading to better governance by punishing bad governmental decisions. [How that could be the case when markets have a relentless focus on the very short term is hard...