The many insights of prospect theory

Behavioural finance has taught us a lot about the sub-optimal fashion in which investors (professional and private alike) arrive at decisions. It is 35 years since Kahneman and Tversky first outlined their version of what was to become prospect theory, highlighting the high value which investors accord to loss aversion relative to commensurate gains. Since then the field of behavioural analysis has expanded massively, most excitingly in recent years by aligning itself to the findings of neuroscience, which can track how different parts of the brain react to different intellectual and emotional challenges.

High frequency trading: a case to answer

By using the emotive phrase “rigging the market” to describe the impact of high frequency trading on the stock markets, the author Michael Lewis has guaranteed himself both extensive publicity and enhanced sales for his new book Flash Boys. In addition, by casting his story in Manichean terms as a tale of one heroic outsider taking on the evil big boys of Wall Street, he risks courting the accusation that he is special pleading for one vested interest rather than taking a principled stand against wrongdoing in the interests of a more general truth.

Ukraine and the events of 1914

The potential parallels between current events in the Ukraine and those that led up to the outbreak of the First World War 100 years ago are so superficially obvious that they may seem too trite to mention. The two cases are clearly far from similar. Nonetheless the recent crop of new historical analyses of how the world stumbled into war in 1914, when coupled with the latest events in Kiev and the Crimea, do prompt some thoughts about the way that modern financial markets assess risks and react to potentially low probability, high impact events.

Nixon and “Goosing the Money Supply”

I have no inside knowledge on whether Janet Yellen or Larry Summers is most likely to be given the job as the next chairman the Federal Reserve. It is not an exaggeration however to suggest, however, as many commentators have already noted, that this is probably the most important appointment that Mr Obama is likely to make in the course of his second term. If the media reports are to be believed, the White House is pushing the claims of the imperious Mr Summers over those of Mr Bernanke’s deputy, even though the former will face the tougher ride at Senate confirmation hearings.

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