Excerpt

PAUL J. DAVIES My name is Paul Davies. I write about markets at The Wall Street Journal. I have no particular theoretical or economic background at all, so I’m enjoying a very hefty dose of impostor syndrome. I’m here to moderate a panel where we will, hopefully, talk a bit more about some of the more practical applications of a lot of what you guys think about and write about and so on. I’ve long been interested in this area. I guess it all started in the financial crisis. I was lucky enough to be at the Financial Times writing about credit derivatives and securitization and all that weird and wonderful stuff.

The vast majority of people that I talked to at that time about the credit bubble said that nothing’s going to stop this. The only thing that’s going to end this great, wonderful time is some major external blow. War with Iran was one of the things that people would always talk about. But a handful, really only one or two very, very smart people I knew said, “No, the shock will come from within.” You know, that it will be—and people knew that it would be—something to do with liquidity. This was going to be the thing that would end it. That would pull, maybe not in quite such a spectacular way as actually happened, but would sort of knock the train off the rails. And so that whole idea of endogenous shocks first brought me into this area, and through lots of different books, and ultimately coming across Eric’s book The Origin of Wealth is what opened up this whole magical world to me.

I also write about insurance and catastrophe modeling and how you work out what’s going to happen with earthquakes and storms and diseases and floods and terror attacks and all of that sort of stuff. I’ve written a lot about banking regulation and that sort of thing as well, which is where, actually, a lot of kind of practical use of more heterogeneous ideas of finance have happened. For example, it is interconnectedness rather than sheer size that decides how much capital a JP Morgan or an HSBC should have. You know, that’s a real practical use of something that’s not really classical economics at all.

So, anyway, we’re going to run this panel in a similar sort of fashion as the others. Each member is going to have five minutes opening, and then we’re going to roll along from there. We should have plenty of time for audience questions. I guess I’ll just start at this end—everybody can introduce themselves. And the opening question really is, where do you see the biggest gap? Between the theory, between what we think we know and understand about the world through complexity economics and similar things, and the practice, what decision-makers really need to navigate the economy. We’ll start with Michael.

MICHAEL MAUBOUSSIN Thank you, Paul. Good afternoon. My name is Michael Mauboussin and I’m at BlueMountain Capital and on the board of trustees at the Santa Fe Institute. I’m going to speak from the vantage point of a fundamental investor, so I’m sort of narrowing the vantage point to some degree. As a fundamental investor, there really are sort of two big tasks to tackle. One is to understand or evaluate the expectations that are priced into an asset. I’ll use stocks as a common example, but what expectations for corporate performance are priced in. Second is to evaluate the business to see whether that company will meet or exceed that set of expectations. I’ll frame my comments in sort of those two areas and what we can learn to close the theory–practice gap. I want to come back to this idea of market efficiency that came up a fair bit throughout the day.

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