Financial bubbles are inevitable and their pathologies virtually identical. The only variable is timing. This is why financial crises appear so obvious in hindsight yet remain frustratingly difficult to predict.
A few years ago, the hedge fund Winton Capital produced a handsome and richly-illustrated book called The Pit and the Pendulum, chronicling many, but by no means all, of the financial crises throughout history.
Winton makes its money by using sophisticated mathematical models to detect when assets are mispriced.
It shouldn’t work, according to the efficient market hypothesis, which posits that current prices fully and accurately reflect all available information.
But David Harding, the founder and chief executive of Winton Capital, thinks the hypothesis is bunkum. He recently told a conference that if markets are efficient, he must be either “a lucky monkey or a fraudster”, adding that “neither of those characterisations appeals”.
Markets are, Harding argues, human constructs. As such, they are prey to every human foible. His comprehensive chronicle of speculative mania and panics was meant to hammer home the point.
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