Allais Paradox and Rational Decisions

Slate has a simple test of rationality, which is really the Allais Paradox. To understand the significance of the Allais Paradox, one has to go back to the Expected Utility Theory proposed by John von Neumann and Oskar Morgenstern in 1944. According to this theory, the expected utility of a gamble or a lottery with [...]

Fooled By Randomness – Nassim Taleb

The gist of Taleb’s book can be explained, at the risk of oversimplification, by using a few examples rooted in basic probability of the kind that relies on a simple coin toss experiment. Suppose one tosses a fair coin 5 times, with a reward associated with getting 5 consecutive heads. The probability associated with this [...]

MGI annual report on Global Capital Markets ending 2006

Notes and numbers from McKinsey Global Insitiute’s (MGI) fourth annual report on Mapping Global Capital Markets. 

The world’s financial assets (calculated by adding together the market value of publicly traded equities, bank deposits, and outstanding face value of government and private debt securities for 100 countries in the MGI database) rose by $25 trillion in 2006, [...]

A Short History of Financial Euphoria – John Kenneth Galbraith

In this book, Galbraith rounds up instances of financial booms and busts, starting from the Tuliopomania in the mid-1630s to the stock market crash in 1987. He cites two primary factors as being the cause of this financial euphoria: the brevity of financial memory and the association of wealth with intelligence. About the former, Galbraith [...]

Sovereign Wealth Funds (SWFs)

The International Monetary Fund (IMF) estimated in September 2007 that sovereign wealth funds, or SWFs, control as much as $3 trillion, and that this tally could jump to $12 trillion by 2012. … As of early 2008, the total assets of SWFs, estimated at nearly $3 trillion, surpass the $1.5 trillion managed by hedge funds worldwide—but [...]

Robert Engle and the ARCH model

In the January 2007 issue of Bloomberg Markets, Peter Carr profiles Robert Engle, co-recipient of the Nobel Prize in Economics in 2003 for his autoregressive conditional heteroskedasticity (ARCH) model [Link]. 
To understand the ARCH model, we first need to know the definition of the terms: heteroskedasticity and volatility clustering. A univariate stochastic process is said to [...]

Jim Simons: from academia to managing the world’s largest hedge fund

Its Medallion Fund–which uses computers and trading algorithms to invest in world markets–returned more than 50 percent in the first three quarters of 2007. It had about $6 billion in assets as of July 1. Simons registered that performance as subprime and related markets were collapsing, sending two mortgage-related hedge funds run by Bear Stearns [...]

Hedge Funds

As of March, by one estimate, there was a staggering $2 trillion invested in hedge funds worldwide, up nearly tenfold from 1999. Today, there are more than 9,000 hedge funds, 351 of which manage $1 billion or more. Traditional investment firms are bleeding talent to hedge funds, and there’s a lot of room left for [...]