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.

The Fed will not take away the punchbowl of easy money soon

Equity investors, says one leading US fund manager, quoted in a prominent national newspaper this week, are “having a hard time” finding anything fundamental to worry about, given the fact that the Federal Reserve has “made plain that we will have easy money for years to come”. Perhaps I should get out more – or at least spend time with a wider sample of the investment community, as my experience is quite the reverse. Most thoughtful investors I speak to are having a hard time not worrying about the implications of the recently reiterated public policy stance of the 100-year-old US central bank.

1 2 3 4 5 6 12