Why Did Academic Economists Fail to Foresee the Crisis?

“Perhaps the reason was ideology: we were too wedded to the idea that markets are efficient, market participants are rational, and high prices are justified by economic fundamentals. But some of this criticism of “market fundamentalism” reflects a misunderstanding. The dominant “efficient markets theory” says only that markets reflect what is publicly known, and that it is hard to make money off markets consistently – something verified by the hit that most investor portfolios took in the crisis. The theory does not say that markets cannot plummet if the news is bad, or if investors become risk-averse.” Raghu Rajan– University of Chicago Booth School of Business

Please read the entire article.  It is fairly short and Dr. Rajan makes some interesting points.

http://forums.chicagobooth.edu/faultlines?entry=30

Thank you marginalrevolution.com for the article.

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About Christopher Hessenflow

Christopher Hessenflow is a financial planner in the Chicago area. He works with all sorts of people who are much more interesting than he is. He enjoys his career which lends him time to think and, sometimes, be creative. Chip was born bald.
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