The adaptive markets hypothesis says that all economic institutions, like our own species, develop and change over time, depending on the population of investors that are engaged with them.
More and more investors may be coming into markets everywhere but that doesn't mean that the markets are really getting more and more efficient, even in the United States. It does mean that there is more access for savvy investors who watch the money flows.
If you rank the top 50 one-day moves in the S&P 500, a fair number of those happened within the last five or 10 years. That tells you that we're in a different, riskier market now.
The United States has the most sophisticated financial markets in the world, which does not leave much room to maneuver. But it also offers investors the greatest access to information and the ability to execute trades quickly and efficiently. So it is a mixed bag of opportunity.
If troubled companies want to explain away 2008 as a 'black swan,' then someone should take responsibility for creating the oil slick that seems to have tarred the entire flock!
Most people are overconfident about their own abilities. That is probably a good thing. But we would be horrified if a physician's aide engaged in heart surgery.
What makes this story so remarkable is that throughout my early childhood I had ongoing learning difficulties, particularly in mathematics. I struggled to learn the multiplication table, and no matter how hard I tried, I simply couldn't remember 6 times 7 or 7 times 8.
During periods of extreme fear or greed, you don't have the proper balance between those two to generate market efficiency and you get extremes in behavior.
Many of us like to think of financial economics as a science, but complex events like the financial crisis suggest that this conceit may be more wishful thinking than reality.
