tag:blogger.com,1999:blog-4039434.post5974381638782391564..comments2024-02-26T06:46:53.171-05:00Comments on Rajiv Sethi: The Economics of Hyman MinskyRajivhttp://www.blogger.com/profile/13667685126282705505noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-4039434.post-7335378245966858882010-03-13T11:32:24.224-05:002010-03-13T11:32:24.224-05:00"But is it really true that Minsky's theo..."But is it really true that Minsky's theory depends on an assumption of significant and persistent departures from economic rationality on the part of firms?"<br />The dependency is irrelevant since the assumption is valid. The irrationality of firms can be proven via the principle-agent problem:<br /><br />The incentive structure of a firm as a whole is very close to the maximization of expected profit. This does not match the incentive structure of the individual traders or money managers employed at the firm. The worst that can happen to an individual trader is that he is fired - his risk is capped. As long as excessive profits contribute to his bonus, he is strongly incentivized to make excessively risky bets: even bets that have negative expected profit! If his bets turn out well, he collects a sizable bonus. If not, well, it's not his dime.<br /><br />This fits in well with Minsky's theory of stability breeding instability. The mechanism of creeping appetites for risk is not the firms' defectively short memory, but their employees' correct assessment of how they are paid. It is noteworthy that in firms where risk is monitored (self-enforced or by outside auditors), the traders have every reason to sweep risk under the rug. One wonders how closely risk-appetites match the discovery of new accounting tricks.Ted Singerhttps://www.blogger.com/profile/12305934000230264456noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-15266909683159818622009-12-07T18:45:09.876-05:002009-12-07T18:45:09.876-05:00Dear Professor Rajiv,
I'd like to thank you f...Dear Professor Rajiv,<br /><br />I'd like to thank you for this post. I have linked to it here. <br /><br />http://www.simoleonsense.com/weekly-wisdom-roundup-56-weekend-reading-for-the-smarter-types/ <br /><br />I'm a young student of complex systems, economics, decision making, finance, and investing and a devout follower of your blog. <br /><br />Given our similar interests. If you have 5 minutes I would like to get your opinion of my blog. <br /><br /><br />Thank you for your time I wish you the best of the holiday season. <br /><br />Miguel Barbosa<br /><br />Founder of SimoleonSense.comPhil Ordwayhttps://www.blogger.com/profile/09018544589368354681noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-82115213916165106652009-12-04T15:03:43.032-05:002009-12-04T15:03:43.032-05:00Some thoughts on how to model FIH with rational ex...Some thoughts on how to model FIH with rational expectations:<br /><br />Lenders know there is a cycle, but they don't know precisely where they are in the cycle. This generates a distribution of lenders, some more risk averse than others.<br /><br />There are some agents who exploit asymmetric information and seek to borrow money from the least risk averse lenders. These agents intend to make short term gains and declare bankruptcy.<br /><br />This may generate an equilibrium where the least risk averse lenders always go bankrupt -- and the only irrationality is that the lenders don't know where they are in the distribution of beliefs about the cycle. (i.e. the definition of a "belief" about the cycle is that everybody thinks his belief is average.)<br /><br />As long as there aren't too many predatory borrowers in the economy, it should be possible for lenders to expect to earn normal profits.Anonymousnoreply@blogger.com