Financial decision making – fraud, theft, madness

Yves Smith has an interesting post and an entertaining discussion recently (I am not saying that my views are the same as Yves, the poster referred to or the contributors to the discussion) on how we need a new word to describe the behaviour / traits of those who appear to have significantly contributed to the global economic mess that the majority of the world is still living with and not able to invest their way out of.

I’ve decided to return to look in more detail at risk – well actually I decided about 15 months ago when I bought Against the Gods, but didn’t get round to opening until today. I previously looked at uncertainty and risk, rational decision making 1, 2 last year, also neuroeconomics – having also tried to understand more about decision making towards the end of the year – for me personally, somehow I cannot find enough connections whilst looking at economic decisions where I have very little emotional interest I guess and personal decision making – so it seemed like the perfect time to revisit risk, to try and reframe my understanding.  I’m only a few pages in but already hooked.

“The capacity to manage risk and with it the appetite to take risk and make forward-looking choices are key elements of the energy that drives the economic system forward” (1)

In this series of clips including this gem, when talking about statements you can hear such as – the market is going to give you 11% in the long run.

“The markets aren’t going to give you 11%, the markets are going to give you what someone will pay for what we own. And you really really don’t know what its going to be, its a very important distinction…..We can’t manage our returns but we can manage risk”

Leaving fraud and theft temporarily aside, madness – can we continue on a micro level managing risk and on a macro level, financial investors managing multiple risks – what is the alternative if we don’t take financial risks..

“The common basis of conflict, and we may say of the existence of wants at all, is the limitation in the means of gratifying some impulse or need. When some means of satisfaction is limited in amount so that we have to plan its use and plan to increase its supply, then it enters into the field of conduct and we have a want. The most common and fundamental conflicts are between claims for our own time and energy, and after these upon some limited material agency or means employed as an aid in satisfying ourselves. Our personal powers are, of course, limited absolutely, and limited in fact still further, conditionally, by the tendency of exertion to become disagreeable, giving rise to a “want” to avoid it. The confusion to be avoided is that between a want, proper, as related to consciously planned action, the weighing of alternatives, and such things as supposed needs or metaphysical explanations of the immediate fact.” (2)

Its interesting to think about it actually in martial arts terms – not over-exerting and finding the way of least resistance. How valuable is it too us to exert, over-exert or not exert on a physical level, how is that tied up with our emotions and therefore how does that all take place in our brains. In our society today with technology everywhere, do we risk more than ever as a resulting of our continually diminishing patience and increased population and increased growth. Will explore in more depth soon.


1. Bernstein P (1996) Against the gods – the remarkable story of risk,p3, John Wiley and Sons, More details at http://www.peterbernstein.com/peters_books_against.htm

2. Knight  F, (1921) Risk, Uncertainty and Profit, Library of Economics and Liberty, available at:http://econlib.org/library/Knight/knRUPCover.html

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http://learn4kicks.wordpress.com, http://www/teazlewood.org.uk, http://mv2k.wordpress.com and several others

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