The Rational Market and Other Financial Myths
Justin Fox is the business and economics columnist for Time magazine. He also writes the "Curious Capitalist" blog at Time.com.
Before joining Time in January 2007, Fox spent more than a decade at sister publication, Fortune. At Fortune, he covered a wide variety of topics related to economics, finance, and international business. In 2000 and 2001, he was the magazine's Europe editor, based in London.
Earlier in his career, Justin worked at several newspapers, including American Banker and the Birmingham News. He has a B.A. in international affairs from Princeton.
Fox is a Young Global Leader of the World Economic Forum. His first book, The Myth of the Rational Market, will be published by Collins in 2008.
Question: What is the appeal of the rational market theory
Justin Fox: The basis of the theory is that Wall Street knows what it’s doing: that prices move on stock markets in particular, but financial markets in general, for a good reason—because all these investors and speculators are bringing all this information and opinion to bear, and are therefore delivering the best possible assessment of what a particular stock or bond or whatever else is worth. And part of the attraction of is, at some level, it is at least partly true. Stock markets are not completely driven by noise; they are not completely driven by irrationality. If they were, I think we would have decided to get rid of them at this point. Although, I guess a lot of people make money often so you never know. But, still, there’s some element of rationality and reflection of fundamentals going on in market behavior, so that’s one reason why it’s attractive.
The other reason why it’s attractive—especially the version of it that was born or reborn in 1960’s and really became incredibly influential in 70’s and 80’s and 90’s—it just makes life so much simpler. If you just simply go from the starting point that financial market prices are right, then you can do so many great things. You can calculate the cost of capital really easily if you’re a corporate decision maker trying to decide whether you want to do an investment or not. You can pick out an investment strategy that makes sense, that balances and risk and reward more appropriately, very easily. You can basically approach the market in this scientific fashion that can be taught to other people and handed down to other people. It isn’t all about gossip or people’s strange opinion. It’s the scientific straightforward guide to decision-making in and around the market.
Question: What alternatives to the rational market theory are being put forward?
Justin Fox: One of the fascinating things that’s going on right now is a bunch of economists, Paul Krugman and Brad DeLong among them, are trying to come up with pretty much rational explanation of bubbles: how bubbles work and what the interaction is between the leverage and bubbles, and what causes them. I’m fascinated by that. I don’t know if it will deliver any real answers, but it is an attempt to use the fact that—even [when] people who, in their individual position as a hedge fund manager or whatever, are behaving entirely rationally need to maximize their own well-being—it creates this system where markets go bonkers, and I think that the lessons that will probably come out of that is: leverage is dangerous. That’s really interesting to me.
Other areas that there are some people who would go head over heels for, and I’m interested in it and I talked about it at the end of the book, is this idea that maybe we can come up with different ways of modeling market behavior that sort of take the fact that investors are constantly learning, but at the same time that the markets that they are trying to understand are constantly changing—so it’s this constant process that [is] moving towards getting things right, but then markets continue moving away from that, so there is never any perfect moment. There is never equal equilibrium. And lots of people, some of them physicists, some of them economists, try to put together these various “adaptive markets” or, I mean, complexity is another term for part for this. It was very fashionable in early 90’s, everybody sort of forgot about it for a while, and now it’s back. I just don’t know where it leads. Nobody got any answers out of it yet as to how markets behave.
Question: What do you think of new investment models such as social lending?
Justin Fox: All these people want to come by and visit an economics columnist for Time, and I’ve been talking to a lot of these people. There is some potential for creating these, what basically amounts to securitized lending, but in a more transparent straightforward way. But I don’t know. At some level, I think we are still figuring out how a financial system actually works. We thought for a little while that all of this stuff has been solved by moving everything out of institutions like banks into markets. But it is just not that easy—debt markets turn out to be incredibly dependent on the rating agencies to tell investors what to buy or not, and they were worse than banks at determining what’s a good loan and what’s a bad loan. I just don’t know what kind of institutions are going to exist. It is very intoxicating to hear about a place like Kiva, which has all these people in the US making tiny loans to somebody starting a bakery in Peru. It’s all very cool, although Kiva has been so successful in part because there’s no attempt actually to make a profit off it. So maybe it’s not a business model, it’s just this new model for organizing charity.
Recorded on: June 30, 2009
Justin Fox of Time Magazine explains the appeal and the downfall of the rational market theory and tells us the next great economic theories and investment models.
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Water may be far more abundant on the lunar surface than previously thought.
- Scientists have long thought that water exists on the lunar surface, but it wasn't until 2018 that ice was first discovered on the moon.
- A study published Monday used NASA's Stratospheric Observatory for Infrared Astronomy to confirm the presence of molecular water..
- A second study suggests that shadowy regions on the lunar surface may also contain more ice than previously thought.
Credits: NASA/Daniel Rutter<p>Still, it's not as if the moon is dripping wet. The observations suggest that a cubic meter of the lunar surface (in the Clavius crater site, at least) contains water in concentrations of 100 to 412 parts per million. That's roughly equivalent to a 12-ounce bottle of water. In comparison, the same plot of land in the Sahara desert contains about 100 times more water.</p><p>But a second study suggests other parts of the lunar surface also contain water — and potentially lots of it. Also publishing their findings in <a href="https://www.nature.com/articles/s41550-020-1198-9#_blank" target="_blank">Nature Astronomy</a> on Monday, the researchers used the Lunar Reconnaissance Orbiter to study "cold traps" near the moon's polar regions. These areas of the lunar surface are permanently covered in shadows. In fact, about 0.15 percent of the lunar surface is permanently shadowed, and it's here that water could remain frozen for millions of years.</p><p>Some of these permanently shadowed regions are huge, extending more than a kilometer wide. But others span just 1 cm. These smaller "micro cold traps" are much more abundant than previously thought, and they're spread out across more regions of the lunar surface, according to the new research.</p>
Credit: dottedyeti via AdobeStock<p>Still, the second study didn't confirm that ice is embedded in micro cold traps. But if there is, it would mean that water would be much more accessible to astronauts, considering they wouldn't have to travel into deep, shadowy craters to extract water.</p><p>Greater accessibility to water would not only make it easier for astronauts to get drinking water, but could also enable them to generate rocket fuel and power.</p><p style="margin-left: 20px;">"Water is a valuable resource, for both scientific purposes and for use by our explorers," said Jacob Bleacher, chief exploration scientist in the advanced exploration systems division for NASA's Human Exploration and Operations Mission Directorate, in a statement. "If we can use the resources at the Moon, then we can carry less water and more equipment to help enable new scientific discoveries."</p>
A study finds 1.8 billion trees and shrubs in the Sahara desert.
- AI analysis of satellite images sees trees and shrubs where human eyes can't.
- At the western edge of the Sahara is more significant vegetation than previously suspected.
- Machine learning trained to recognize trees completed the detailed study in hours.
Why this matters<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8yNDU2MDQ1OC9vcmlnaW4uanBnIiwiZXhwaXJlc19hdCI6MTYzOTkyODg5NX0.O3S2DRTyAxh-JZqxGKj9KkC6ndZAloEh4hKhpcyeFDQ/img.jpg?width=980" id="3770d" class="rm-shortcode" data-rm-shortcode-id="3c27b79d4c0600fb6ebb82e650cabec0" data-rm-shortcode-name="rebelmouse-image" />
Area in which trees were located
Credit: University of Copenhagen<p>As important as trees are in fighting climate change, scientists need to know what trees there are, and where, and the study's finding represents a significant addition to the global tree inventory.</p><p>The vegetation Brandt and his colleagues have identified is in the Western Sahara, a region of about 1.3 million square kilometers that includes the desert, <a href="https://en.wikipedia.org/wiki/Sahel" target="_blank">the Sahel</a>, and the <a href="https://www.sciencedirect.com/topics/agricultural-and-biological-sciences/subhumid-zones" target="_blank" rel="noopener noreferrer">sub-humid zones</a> of West Africa.</p><p>These trees and shrubs have been left out of previous tabulations of carbon-processing worldwide forests. Says Brandt, "Trees outside of forested areas are usually not included in climate models, and we know very little about their carbon stocks. They are basically a white spot on maps and an unknown component in the global carbon cycle."</p><p>In addition to being valuable climate-change information, the research can help facilitate strategic development of the region in which the vegetation grows due to a greater understanding of local ecosystems.</p>
Trained for trees<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8yNDU2MDQ3MC9vcmlnaW4uanBnIiwiZXhwaXJlc19hdCI6MTYzNTk5NTI3NH0.fR-n1I2DHBIRPLvXv4g0PVM8ciZwSLWorBUUw2wc-Vk/img.jpg?width=980" id="e02c0" class="rm-shortcode" data-rm-shortcode-id="79955b13661dca8b6e19007935129af1" data-rm-shortcode-name="rebelmouse-image" />
Credit: Martin Brandt/University of Copenhagen<p>There's been an assumption that there's hardly enough vegetation outside of forested areas to be worth counting in areas such as this one. As a result the study represents the first time a significant number of trees — likely in the hundreds of millions when shrubs are subtracted from the overall figure — have been catalogued in the drylands region.</p><p>Members of the university's Department of Computer Science trained a machine-learning module to recognize trees by feeding it thousands of pictures of them. This training left the AI be capable of spotting trees in the tiny details of satellite images supplied by NASA. The task took the AI just hours — it would take a human years to perform an equivalent analysis.</p><p>"This technology has enormous potential when it comes to documenting changes on a global scale and ultimately, in contributing towards global climate goals," says co-author Christian Igel. "It is a motivation for us to develop this type of beneficial artificial intelligence."</p><p>"Indeed," says Brandt says, "I think it marks the beginning of a new scientific era."</p>
Looking ahead and beyond<p>The researchers hope to further refine their AI to provide a more detailed accounting of the trees it identifies in satellite photos.</p><p>The study's senior author, Rasmus Fensholt, says, "we are also interested in using satellites to determine tree species, as tree types are significant in relation to their value to local populations who use wood resources as part of their livelihoods. Trees and their fruit are consumed by both livestock and humans, and when preserved in the fields, trees have a positive effect on crop yields because they improve the balance of water and nutrients."</p><p>Ahead is an expansion of the team's tree hunt to a larger area of Africa, with the long-term goal being the creation of a more comprehensive and accurate global database of trees that grow beyond the boundaries of forests.</p>
Tea and coffee have known health benefits, but now we know they can work together.
Credit: NIKOLAY OSMACHKO from Pexels
- A new study finds drinking large amounts of coffee and tea lowers the risk of death in some adults by nearly two thirds.
- This is the first study to suggest the known benefits of these drinks are additive.
- The findings are great, but only directly apply to certain people.