Monthly Archives: January 2015

Hormones and Financial Intermediation

Posted on by

A recent post reminded me that Jason Collins really liked The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, by John Coates. Coates looks at how hormones are activated in traders. My guess is that I will get as much from Jason’s review as I would from the book. Jason writes,

In a bull market, testosterone surges through the population of traders. Each takes larger and larger risks, pushing markets to new highs and triggering further cascades of testosterone. Irrational exuberance has a chemical base.

Read the whole review. I would like to see the link between an individual short-term hormonal response and broad, long-term market trends established.

I do believe that there are cycles of financial intermediation. Remember how I think of financial intermediation. Households and businesses want to hold riskless, short-term assets while issuing risky, long-term liabilities. Financial intermediaries accommodate this by doing the opposite. When there is too little financial intermediation, opportunities to take reasonable risks are foregone. When there is too much financial intermediation, there is excessive risk-taking.

To a first approximation, I am not sure that simple trading of financial assets should boost testosterone on net, because financial trading is not positive sum. It’s not like “you want meat and I want shoes, so I’ll trade you meat for shoes.” Financial trading is closer to zero sum, which is why when you win you get high. The guy who sold you that stock that went up 5 points right after you bought it probably feels badly. So why should a bull market make more people feel high? Perhaps because as share prices increase, net financial intermediation is going up overall. That is, there are more short-term, low-risk liabilities being backed by more long-term, high-risk assets. Maybe that increased financial intermediation is accompanied by and reinforced by a hormonal response. Perhaps that is plausible, but it seems to me to require more of a stretch and, above all, more of a story of how markets react in the aggregate, or how System 2 and System 1 interact over long periods of time and across an entire array of market individuals and institutional relationships.

Who is an Influential Economist?

Posted on by

Tyler Cowen writes,

Let me just note that for all the talk of wonk this, data that, and Generalized Method of Moments this that and the other, every now and then the best algorithm is simply Asking Tyler Cowen.

I certainly disagree with quantitative rankings that are based on mentions in social media, a methodology that picks up controversy and obsession with Fed officials.

Let me define influence as “effect on young minds.” I think that Paul Samuelson still has the most influence. Most economic textbooks are descendants of his. Milton Friedman has great influence. Most free-market rhetoric is derivative of his.

Living economists?

Steve Levitt. Not my cup of tea, but I have encountered a number of young women who are ardent admirers, which is something I cannot say about any other economist.

Daniel Kahneman. I know many economists and non-economists who have read Thinking Fast and Slow. Not just bought it because it was famous and stopped reading after a few pages, but got through the whole book.

Paul Krugman, for better or worse. If you look in the blogosphere and op-edsphere at the ratio of uncharitable to charitable treatment of those who disagree, then you have a measure of the ratio of his influence relative to mine.

Stan Fischer, for better or worse. The Genghis Khan of macroeconomics, as I put it.

Tyler Cowen. Where would the economics blogosphere be without him?

A Nice Rant

Posted on by

Kevin Williamson writes,

the Left’s fundamental intellectual defect — at least in the critique of those liberals who are now obliged to call ourselves “conservatives” — is that it seeks to establish something very much like the arbitrary princely powers that Smith and Hayek warned against, and that Washington fought against. The Left believes that this power can be made benevolent not by the strengthening of democracy — that is not precisely right — but rather by making ever-greater portions of society subject to arbitrary princely powers when those powers enjoy the endorsement of a plebiscite, as though handing over Augustus’s powers to the tribune of the plebs would constrain the imperial tendency.

I try to resist posts of the form “Hurray for my team, boo for their team.” But I am making an exception for Williamson’s piece.