I was reading Akerlof and Shiller’s ‘Animal Spirits’ and it dawned on me how our basic microeconomics assumption of our utility calculus is wholly unrealistic and simply unconvincing. Imagine that we’re able to continuously balance between the amount of money to spend and save for the future. Absolutely weird; it’s suggesting that there’s always an optimal sum of money that should be in our bank accounts, in our wallet and in various different investment instruments that would provide a return, properly adjusted to our capacity for risk (assuming the risk assessment in accurate mathematically in the first place).
Uncertainty and lack of information plays a huge part in limiting our computation abilities, not the mention the lack of access to sophisticated computational instruments that would be vital for us to perform these calculations. In many sense, that is the assumption we are making when we think that finance is a really perfect market and that it’s efficient. It’s not. Instruments of prevailing levels of sophistication would not be necessary if reality is as crystal clear as what the efficient market hypothesis requires it to be. And with the lack of such efficiency and ‘ultra-rational players’, we’re effectively trap in a complex loop of relations (and thus manipulated by ‘fate’ and ‘luck’) that would not exactly allocate capital as efficiently as we would like to believe.
Just my two cents worth. It’s not on ERPZ for the reason that I’ve found (or is not rational enough to attempt to find) nothing to support my case.
