Justin Fox on Regulatory Reform and Market Irrationality -- Seeking Alpha:
"...a lot of people in academic finance had this idea that financial market prices were more reliable and rational than those in goods markets, because financial markets were more liquid, prices were less sticky, etc. But when you think about what participants in financial markets are actually doing—”anticipating what average opinion expects the average opinion to be,” as Keynes put it—it’s pretty clear that there’s going to be a tendency toward herding and bubbles that is far less likely to be found in markets for eggs or SUVs. And in the first half of this decade the real estate market, which has aspects of both a goods market and a financial market, went totally financial."
"If you just mean securities markets are hard to outsmart, which is what Malkiel’s getting at, then he’s right. I haven’t been able to bury that notion, and I wouldn’t want to. If you mean that the prices prevailing in securities markets are always rational and reasonable, which really is what lots of finance professors used to believe, then that’s pretty well dead and buried by now. The upshot for regulation is that financial markets go crazy, but you can’t rely on regulators knowing when markets are wrong"
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