What is Big Think?  

We are Big Idea Hunters…

We live in a time of information abundance, which far too many of us see as information overload. With the sum total of human knowledge, past and present, at our fingertips, we’re faced with a crisis of attention: which ideas should we engage with, and why? Big Think is an evolving roadmap to the best thinking on the planet — the ideas that can help you think flexibly and act decisively in a multivariate world.

A word about Big Ideas and Themes — The architecture of Big Think

Big ideas are lenses for envisioning the future. Every article and video on bigthink.com and on our learning platforms is based on an emerging “big idea” that is significant, widely relevant, and actionable. We’re sifting the noise for the questions and insights that have the power to change all of our lives, for decades to come. For example, reverse-engineering is a big idea in that the concept is increasingly useful across multiple disciplines, from education to nanotechnology.

Themes are the seven broad umbrellas under which we organize the hundreds of big ideas that populate Big Think. They include New World Order, Earth and Beyond, 21st Century Living, Going Mental, Extreme Biology, Power and Influence, and Inventing the Future.

Big Think Features:

12,000+ Expert Videos


Browse videos featuring experts across a wide range of disciplines, from personal health to business leadership to neuroscience.

Watch videos

World Renowned Bloggers


Big Think’s contributors offer expert analysis of the big ideas behind the news.

Go to blogs

Big Think Edge


Big Think’s Edge learning platform for career mentorship and professional development provides engaging and actionable courses delivered by the people who are shaping our future.

Find out more

The Fourth Era of Financial Markets

May 22, 2012, 12:20 PM

Are the financial markets rational?  It's a tough claim to make as share prices and bond yields zoom up and down during a single day, hour, or even second, sometimes without any obvious reasons.  Yet for the first time in human history, the markets may be approaching the ideal of rationality that economists have long cherished.

Since the very beginning of organized financial markets, bubbles and panics have been a fact of life.  In the twentieth century, however, economists decided that people were rational; they made the best decisions possible using all the information available, and they didn't make mistakes systematically.  But this theory didn't jive well with the facts.  The markets still acted in ways that economic theories couldn't predict.

Enter behavioral finance.  For the past two decades or so, researchers working at the nexus of economics and psychology have been able to model the apparently irrational behavior of markets.  They've studied why people appear to act against their own interests, become overconfident in their ability to interpret new information, and let the spirit of the mob take over.  Not surprisingly, plenty of traders have tried to take advantage of this new modeling to predict ups and downs in the markets.  These days, some are even using Twitter and other social media (http://www.usatoday.com/money/perfi/stocks/2011-05-03-wall-street-traders-mine-tweets_n.htm) to gauge hysteria and use it for arbitrage - buying securities whose value has been depressed by hysteria, or selling those that have been overhyped.

Yet something happens when traders engage in arbitrage on a massive scale: the arbitrage opportunities tend to disappear.  The very trades intended to take advantage of the market's mispricing end up setting new prices that better reflect the value of the underlying securities.  By trying to exploit hysteria, traders may be doing away with it altogether.

As a result, we are entering the fourth era of financial markets.  In the first era, markets fluctuated wildly, but no one knew why.  Later, economists claimed to know why but had missed a vital piece of the puzzle.  Then they found the missing piece, and its importance was quickly transmitted from the ivory tower to the trading floor.  And now, at last, the markets have a chance to become the classically rational stuff of economists' dreams.



The Fourth Era of Financial...

Newsletter: Share: