Group discussion on Chaos
Charles Pahud de Mortanges – University of Liège
Protecting assets at the edge of chaos : We seem to be living in an environment of economic, political, and social CHAOS, where we know what we know; often know what we don’t know; occasionally don’t know that we know; and always don’t know what we don’t know. We propose several “battle-tested” HEURISTCS: Understand market dynamics; Adapt intelligently to market conditions; Focus on economic-value-adding, growth-generating businesses at reasonable prices; and Respect quarterly cycles.
Discussion point 1: The Brain Makes it Difficult to Make Money in Stocks (Why intelligent people are often poor investors). Discussion Point 2: Are the Current Financial Markets a Pyramid Scheme?
Speaking about “extreme events”, given their competences, why aren’t management (finance/investment) professors billionaires? How to conceptualize, model and anticipate the impact of political leaders, managers and investors misconceptions and incompetence on business valuation and markets operation? If Milton Friedman is right when he writes : ”The great virtue of a free market system is that it… is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another,” what happens when political leaders, managers and investors stop lying at each other and respect each other?
- Jean-Marie Choffray and Charles Pahud de Mortanges « Protecting Assets Under Non-Parametric Market Conditions » forthcoming in the handbook Extreme Events in Finance, Wiley.
Summary of the group discusions:
The discussion centered around the idea how to protect assets when the (financial) world appears to be in a state of chaos, plagued by various knowns and unknowns. We considered a number of “tried & true” heuristics an investor may effectively rely upon when evaluating the market as a whole, as well as individual companies. The question was asked why (even very intelligent!) people are often poor investors – based on the argument that the human brain is poorly equipped to make money in the markets.