Debate Magazine

Markets and Regulation

Posted on the 26 June 2014 by Markwadsworth @Mark_Wadsworth

A couple of thoughts have been echoing around in my tired old noggin that I thought I'd share for comment.
Behavioural Economics
As you may or may not know the Financial Catastrophe Authority has taken to its heart 'behavioural economics'.  They have elected to use the insights from BH to guide their policymaking.  They use it to justify more and more interventions.  Now, as I understand it the basic thrust of BH is that people are irrational and do irrational things.  Fair enough, and probably true.  But things I think are rational you may not.  And if BH holds then it is self evident that the FCA apparatchiks (who are presumably human) are just as subject to making irrational decisions as everyone else.  And since such central planning style regulation and interventions has historically always failed, would seem to confirm it.  In other words the FCA is barking up the wrong fish and FS would be better served if it would just shut itself down.
Efficient Market Hypothesis
EFM is in many ways a thought experiment, but by observation it does seem to have a lot of merit. Essentially what EFM proves, or at least explains, is that stock picking by fund managers is generally fruitless and cannot reliably ever produce superior returns or even returns that match market returns.  That is 'picking winners' does not work.  Such picking winners behavior is very similar to the FCA's interventions that try to 'pick winners' in FS, in the sense of prescribing by way of very detailed rules exactly how all FS businesses should trade.  The FCA is 'centrally planning' the FS industry.  As the EFM holds it can also be applied to the FCA and informs us that such 'picking winners'behaviour by the FCA is doomed to failure.

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