October 29, 2009

Financial Bubbles – Human Behavior & Risk Management

Finance/Investment

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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October 29, 2009

Stock Market & Dollar

Market Analysis

The recent stock market boom is a symptom of excess liquidity caused by government policies. The liquidity is supposed to be injected into the real economy, but instead it is causing asset bubbles. The premise of the stock market rise is a falling dollar. Recently sentiment of the dollar has become so negative that a correction is over due. However, the government has no sign of monetary tightening, so it is fair to expect the dollar to resume its fall […]

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October 14, 2009

The Value of Gold

Finance/Investment,The World

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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