First, there was the crash in stock prices in October 1987. The late 1990s saw a spectacular rise and fall in technology stocks. The irrational exuberance shifted to real estate, leading up to the peak in August 2006, followed by a crash that helped cause the global financial crisis. Even former chairman of the Federal Reserve Alan Greenspan apologised: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity — myself especially — are in a state of shocked disbelief.”
Many other economists who were ardent supporters of the efficient market hypothesis (EMH) have also been surprised by recent history but there is one man who would not have been “shocked”: John Maynard Keynes.
Keynes is remembered for his view that governments should spend money in recessions to regain full employment, an argument made famous in The General Theory of Employment, Interest, and Money (1936). Few, however, realise that Keynes was a true forerunner of behavioural finance. Had more people, including Greenspan, studied the chapter of The General Theory on financial markets, the crisis might have been avoided.
Keynes thought markets had been more “efficient” at the beginning of the 20th century, when managers owned most of the shares in a company and knew what it was worth. As shares became more widely dispersed, “the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them . . . seriously declined”.
By the time of The General Theory, Keynes had concluded that markets had gone crazy. “Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market.”
To buttress his point, he noted the fact that shares of ice companies were higher in summer months when sales are higher. This fact is surprising because in an efficient market, stock prices reflect the long-run value of a company, and do not rise in good seasons. Recent academic studies show this pattern is still true.
Keynes was also sceptical that professional money managers would perform the role of the “smart money” that EMH defenders rely upon to keep markets efficient. Rather, he thought they were more likely to ride a wave of irrational exuberance than to fight it. One reason is that it is risky to be a contrarian. “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Instead, Keynes thought that professional money managers were playing an intricate guessing game. He likened it to a common newspaper game “in which the competitors have to pick out the six prettiest faces from 100 photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole: so that each competitor has to pick, not those faces that he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view . . . We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some,
I believe, who practise the fourth, fifth, and higher degrees.” I believe Keynes’s beauty-contest analogy remains an apt description of how financial markets work, as well as of the key role played by behavioural factors.
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Autor: Richard Thaler- Continua aqui
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