behavioural economics
DESCRIPTION
Slides from Rupesh Parikh's talk at Erevna in January 2014 on the topic of Behavioural Economics.TRANSCRIPT
Behavioural EconomicsMasterclass by Rupesh Parikh
Game 1
Would you rather:a) Receive £450 in cash nowb) Have 50% chance of receiving
£1000, but also 50% chance of receiving nothing
Game 2
Would you rather:a) Lose £450 in cash nowb) Have 50% chance of losing £1000,
but also 50% chance of losing nothing
Are economists' assumptions good
approximations of real people's behaviour?
E.g.1 Bernie Madoff
Trader and Broker Reported
abnormally large returns of 5.6% in 2008
$36bn transferred into his fund
SCAM Collapse
E.g.2 LTCM Investment Firm Run by Merton and
Scholes Nobel Prize
winners for theory of market manoeuvres regarding US and Soviet bonds
Market did not act as empirical suggestions denoted
Bankruptcy
E.g.3 David Li
Actuary / Quant Mathematical
correlation theory (Gaussian Copula)
Assumed that market would function at all times
Aggregate changed – but the model didn’t
Collapse
Keynes – Animal Spirits
Decisions often made out of a spontaneous urge to react
Cornerstone of economic theory is consumer confidence
The key, therefore, is to revive confidence in markets.
This should not tip over to arrogance!
Confidence
Bubbles
Economic Froth driven by human behaviour acting irrationally
Bubbles are created – don’t match the law of demand!
Story of 2008...
Conclusions
Greed ? Is it an animal spirit? Was it rational to start selling sub-
prime? Was it a good idea invest in a bubble
based on other people’s investment?
http://www.youtube.com/watch?v=bx_LWm6_6tA