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Tuesday, January 20, 2009 

Financial markets are not casinos, but sometimes appear to be

The financial credit crisis and the resulting economic contraction seriously undermined the credibility of financial markets, institutions and operators over the past months. More and more people from different part of the globe are saying that the markets are characterized by irrationality, bubbles, fashion and frenzy and that the actors in the economy are being driven by assumptions. In fact, the controversy of how the markets react to news has encouraged George Soros to write a book following this line of thought. He is even said that the established financial theory is obsolete. In essence, he believes that the current financial crisis is the final proof that markets do not process the information efficiently. If so, we are closer to the design of John Maynard Keynes, who said the market is a casino, than the design of Friedrich von Hayek, who sees him as a wonderful mechanism for processing scattered information. My opinion can be found in the middle of both; I don’t agree simultaneously with both because the markets act according the psychology of the current environment and the numbers of participants in that specific time. This is not a casino, we are buying or selling securities based on earnings and in the future prospect. The problems that we’re observing right now in the financial markets have much to do with the lack of information on quality, with incentives and wrong, in fact, with rational reactions to the surrounding environment. When information is scarce and is distributed unequally, prices may fall away from the fundamental reality of the economy. The controversy over the irrationality of financial markets is not a mere academic debate. If we are convinced that economic agents are irrational, then apply paternalistic policies aimed at controlling the behaviour or to rescue the officials and institutions that fail, which can be counterproductive and even dangerous, because it can be accompanied by restrictions on investment by institutions and individuals, as well as intrusive regulation that limits, or dictate, their conduct in the market. Financial markets are not casinos, but sometimes seems to be. The correct regulation is fundamental to regain the investor confidence that has lost it over 2008, bringing to the markets the right functionality that everybody likes to have when the time to invest comes.


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About Me

  • I'm a 48 year old Independent Trader using proprietary technical analysis with more than 20 years experience of investing in the US stock markets. I started this blog in 2006 simply as a way to share my thoughts about capital, risk management, and trading. My blog contains only my personal opinion and is provided for informational purposes only.

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