"History is a wonderful thing, if only it was true"

Sunday, March 22, 2009

File under Duh

"Systems" work until they don't

Physicists Try to Predict Economy - Portfolio.com

"Consider financial derivatives, for example. It’s taken for granted by economists that derivatives make markets more stable. They are designed to give market participants more flexibility by allowing them to take highly specific market positions. But some economists—notably William Brock of the University of ­Wisconsin and colleagues—have suggested that this view may be backward. They are exploring the consequences of adding one rather obvious fact to standard economic models: that people learn as they participate in markets and may quickly copy other investment strategies if they seem to be working. The result is a pile-on that makes the initial strategy ineffective. Brock’s results show that such adaptive learning leads to derivatives actually destabilizing markets."

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