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Promoting Economic Stability

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Promoting Economic Stability

Managing the Unstable Relationship Among Banks, Investment and Innovation

World Economic Forum,

5 min read
5 take-aways
Audio & text

What's inside?

In financial markets, irrationality often trumps rationality in investment decisions.

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6

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Recommendation

According to neoclassical economic theory, market participants should behave rationally in their pursuit of positive investment outcomes. But this is not the case in reality, and Jonathan Adair Turner explains why in this brief World Economic Forum IdeaLab talk. getAbstract recommends Turner’s basic lesson to neophyte investors who wish to learn how financial markets tick and prescribes his provocative discussion topic to market analysts and policy makers seeking a more stable, less crisis-prone financial system.

Summary

Neoclassical economic theory posits that investors and banks choose investments and financing commitments by means of a rational decision-making process whereby they calculate the net present value of discounted future cash flows. As a result, the economy should prosper, because projects that offer “the highest possible rate of return for society” receive funding. Alas, this description of the investment process doesn’t unfold in reality. Participants don’t make rational decisions; rather, they act in response to fluctuations in prevailing market sentiments of “exuberance and then despair.” The...

About the Speaker

Jonathan Adair Turner of the Institute for New Economic Thinking is also a member of the Bank of England’s Financial Policy Committee.


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