Milton Friedman and Big Companies

Milton Friedman had pointed out that socialism and dictatorship is the natural tendency of human societies.  He had also observed that free market capitalism and the subsequent prosperity is the exception rather than the norm in human history. In fact, we can generalize the above conclusions to all human organization.   And such tendency is what drives big companies to failure.  These companies once had all the resources to maintain their market dominance.  Unfortunately, sooner or later the succumb to […]

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Financial Bubbles – Human Behavior & Risk Management

Someone in linkedin asked how human behavior contribute to financial bubbles and how to manage such risk.  Here is my answer: If you think of a bubble being the consequence of inefficiencies in the market, then we can examine how the two premise of efficient market theory can be broken: 1. Misinformation. Academics assumes perfect information to make their models work. In reality, misinformation is everywhere. To be more precise, misinformation is greatest when something is new. That’s why bubbles […]

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The Value of Gold

Recently I had a conversation with a friend, who asks me, “why is gold valuable?  It is just a metal that people dig it up and bury it again underground.  It is not income-generating.  You can’t eat it or use it in any productive purpose.  Then why do people buy it and invest in it?” I think he is right in that gold does not have much value as a productive asset.  The value of gold, however, comes from it […]

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Google Insights for Search calls stock market bottom

Here is a comparison of the amount of searches in google for “economic recession” and “economic recovery” with the stock market (QQQQ is the nasdaq index fund).   A peak in interest about economic recession along with a peak in interest about economic recovery calls for the March bottom in stock prices.  This makes sense in that the crash stops when lots of people is worrying about a recession and more people start to see recovery. You can access the most […]

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Keynesian vs. Austrian Debate on Deficits

Recently there are a lot of debates between the Keynesian and Austrian economists on the skyrocketing government deficit. My opinion is this: In general, government spending is wasteful.  To expect governments to efficiently allocate capital is a larger mistake than to believe in Bernie Madoff. Keynesian policies only makes sense if consistently followed.  The true Keynesian policy maker would save money during good times and spend money during bad times.  The intention of such policy is to smooth out the […]

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