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Promoting Economic Stability
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Promoting Economic Stability

Managing the Unstable Relationship Among Banks, Investment and Innovation

Jonathan Adair Turner
World Economic Forum, 2014
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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.

Take-Aways

  • Neoclassical economic theory posits that investors and banks select investments by rationally calculating the net present value of discounted future cash flows.
  • In reality, however, sentiment greatly guides investors’ decision-making processes. They act in response to market “exuberance and then despair.”
  • While overexuberance can incur huge market losses, positive long-term benefits sometimes ensue. The extensive rail network that resulted from the United Kingdom’s mid-1800s railway boom was critical to the nation’s industrial development.

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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