Financial Markets for Thought

Some people know that I spend a lot of time outside of work studying and listening/watching various specials or educational presentations. It is important to keep your mind moving and learning because, let's face it, you can never know too much. Well I recently finished the Game Theory course on Academic Earth and started the Financial Markets course. The course is actually taught by Robert Shiller (yes the guy from the Case-Shiller index which is so well known these days). I actually got to ask Robert Shiller a question when I went to a presentation of his in the last year.

I won't post the 3 lectures I have watched so far since it is over 4 hours of watching and I know that if you wanted to watch them you would just follow my links. However I wanted to highlight a couple of interesting statements made by him. (All are paraphrased.)

• Successful Finance people will be philanthropists because no one can ever spend a billion dollars. This is likely true. He asserted that all successful financial people will end up spending time with a charity where they donate their money.
• Financial Engineering is a great thing (as is patenting the processes) because it helps the markets work. See lower but he views all financial products as good things as they are equalizers.
  
• Financial Engineering is copied by everyone once it works but the time it takes to make them work is long. He had an interesting discussion in lecture 3 I believe about what happened in the 1800s to allow for financial markets. (Also about human experiences.)
  
• Financial Markets are similar to Communism (I know I am paraphrasing but his point was:) because they equalize things. Without financial markets and risk management the rich are the ones who were lucky enough to not have something bad happen (like lose their health insurance) and the poor were victims of fate. This is a gross generalization but I can see where he is coming from. So if you spread the risk around (financial markets and engineering) the risk is more equalized. (He also was a proponent of progressive taxes which is kinda expected given the other things.)
  
• If financial markets were prefect then there would be total equality and sharing of risk and everyone would be equally rich. Basically you can arrive at communism through financial markets because all risk and rewards are spread evenly. I know this is not communism but the point is what I believe he was trying to make. It is a very interesting idea that bares some thought.
  

I know these are a couple of very interesting statements and I hope I paraphrased them correctly. Basically financial markets are the adjustment of risk. If the market was perfect there would be no arbitrage opportunities and to have the lowest risk you would have a piece of every financial vehicle. So the only things that would hurt would be world ending catastrophes (or risks systemic to everyone). He then went to explain how this was derived from (for instance) frontier living where everyone would help to rebuild any house in case of a fire in the village because next time it might be yours that you need help with. It is a very interesting way at looking as something that is thought of (in the public's eye) to be this hardened capitalist idea (come on, who thinks of financial markets as socialist?). The idea that it could be the equalizer? Really interesting stuff. I can't wait to get through more of this course as it is already turning out to be a page turner. :-) I strongly suggest watching them. If anyone would like to 'take' the course with me I could set up a study on this blog where we could chat or something.