Join us for a DRUCKER BUSINESS FORUM
Co-Presented with KPCC featuring:
Are the Financial Markets Rational?
Finance and Economics Columnist, Time magazine
in conversation with Kai Ryssdal, host of public radio’s Marketplace
and Paul Zak, Professor of Economics at Claremont Graduate University
Thursday, December 3, 2009
Breakfast: 7:45 A.M. TO 8:30 A.M.
Forum: 8:30 A.M. TO 9:30 A.M.
LOS ANGELES PUBLIC LIBRARY
630 West Fifth Street, Downtown Los Angeles
RSVP by Wednesday, December 2 to:
Ted Habte-Gabr firstname.lastname@example.org
Justin Fox is the business and economics columnist for TIME magazine, and author of the popular Time.com blog The Curious Capitalist (www.time.com/curiouscapitalist). He was previously an editor and writer at Fortune. He appears regularly on CNN, CNBC and PBS’s Nightly Business Report.
In his recent book, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, TIME editor-at-large and economics columnist Justin Fox tells the story of the rise and fall of the enormously powerful and at times enormously dangerous belief that financial markets are rational, reliable and capable of regulating themselves.
The financial crisis now gripping global markets was unleashed in part by the conviction that investors in mortgage securities knew what they were doing and would set prices that accurately reflected the risks at stake. This rational market theory has its roots in the early 20th century, as ideas from physics and mathematics began to trickle into economics. The process reached a crescendo in the 1960s at MIT and especially at the University of Chicago, where scholars rallied around what they called the efficient market hypothesis.
This hypothesis holds that the stock market is both random and perfectly rational, its every move a reaction to real changes in the economic value of the companies whose shares traded upon it, that the decisions of millions of investors, all digging for information and trying to outsmart one another, will always provide the best measure of a stock’s value. The theory soon traveled beyond the stock market to apply to other securities and especially to what came to be known as derivatives—financial instruments whose value was based on yet other financial instruments. Even after dissident young scholars began to poke holes in rational market theory in the early 1980s, its influence in the real world only grew. It spawned index funds, powerful-if-flawed new ideas about corporate governance, and the strange new wonderland of credit default swaps and collateralized debt obligations. Now, because of the financial crisis, its very intellectual foundations seem to be disintegrated.