“The financial crisis didn't happen because its techniques didn't work; it happened because they worked all too well. There is an element of truth to Warren Buffett's characterization of these techniques as 'financial weapons of mass destruction.' Securization, credit default swaps, and other derivative securities are the financial equivalent of Einstein's famous formula. Global financial markets contain enormous financial energy, and when detonated in an uncontrolled and irresponsible manner, you get bubbles, crashes, and years of nuclear fallout. But the analogy works both ways - it also implies that when we use these tools carefully and responsibly, we get virtually unlimited power for fueling innovation and economic growth.” GrowthInnovationFinance Book:Adaptive Markets: Financial Evolution at the Speed of Thought Source: Adaptive Markets: Financial Evolution at the Speed of Thought
“In the Adaptive Markets framework, complexity means we don't have a good narrative for the system. The solution is obvious: we need to get smarter. Complexity can sometimes be reduced by developing a deeper understanding of the underlying structure of the system. For example, now that we understand the potential for liquidity spirals in statarb portfolios, thanks to August 2007, we can better prepare for them. But the Adaptive Markets framework points to a second problem with complexity, which is the potential divisiveness of special knowledge and the potential for conflict. If the financial system becomes so complex that only a small number of elites truly understand its function and proper maintenance, this knowledge divides the population into those who know and those who don't. Of course, this situation arises with any piece of unique information - I know how to make scallion pancakes in a particular way so they're crispy on the outside but soft and chewy on the inside, and you probably don't. But that piece of knowledge is hardly worth keeping a secret, and the fact that you don't have that knowledge isn't going to get you too upset. But suppose I know how to cure diabetes and you don't. Or I know how to prevent cancer by avoiding certain common foods and you don't. Or I know how to price mortgage-backed securities and credit default swaps and you don't. In these cases, the knowledge I possess confers a certain power and status to me. Complexity creates the need for better narratives and those who have those narratives will become the high priests of complex systems, the gatekeepers of critical, life-altering knowledge. And the difficulty in joining the priesthood - earning an MD/Ph.D. in molecular biology and having twenty year of work experience at biotech and pharmaceutical companies, in the case of curing diabetes - coupled with the societal values of the special knowledge will determine the divisiveness of this elitism.” KnowledgePowerComplexityGatekeepersDivisiveness Book:Adaptive Markets: Financial Evolution at the Speed of Thought Source: Adaptive Markets: Financial Evolution at the Speed of Thought
“Not surprisingly, the father if market efficiency, Gene Farma, has a very clever way to avoid the pitfalls of hyperbolic discounting. When he's invited to talk or engage in sone business activity, he has a . simple rule for deciding whether to accept: no matter how far in the future it's scheduled, he ask himself whether it's something he would want to do if the event were next week; if the answer is yes, he accepts, otherwise, he politely declines. This simple rule of thumb ensures that he uses the same discount rate across all decision horizons.” Rule Of ThumbHyperbolic Discounting Author:Andrew W. Lo