efficient markets and financial market behavior/psychology(ZT)

Global Financial Risk Myths	WANBLI1	NEW 11/23/2007 9:55:01 AM
Whilethe Global Financial System (GFS) goes awry we are told by same GFScenter leaders, (even Henry Paulson) that financial globalizationbrings more diversity and hence reduces risks of financial shocks.Because of these very global diverse markets everything is okay risk isspread –- not problem – no worry. So why is the current GFS in crisis, disarray and careening out of control? Couldit be that the global “speed” of information flow due to technologycauses increased impacts on markets which in turn cause unanticipatedincreased impacts on financial market risks? Mordecai Kurz(Stanford University) recent work in efficient markets and financialmarket behavior/psychology may make global financial markets morevulnerable than less. Sifting through and piecing together some threads of Kurz's line of market psychology reasoning... 1.The global speed of diverse financial information flows, brought-on bytechnology, also speeds up the response time of news and henceforthspeeds-up investor reaction times. 2. The global speed of financialinformation flows now in the hands of billions of decision makers atthe same time, now causes ‘belief clustering' or “correlation ofinvestor beliefs and expectations” built on top of the speed of theirresponse, which in turn leads to more rapid ‘over and under shoots'. Inother words billions of the worlds individual investors all ‘know theyare in the same boat as everyone else', either all will react instantlywhen they have the same information or all will wait until all have thesame information. The result is the same a serial correlation ofbehaviors. 3. The global speed of financial information flows inthe hands of billions of decision makers, making their rapid decisionsalso reveals much faster, the inadequacy and inability of financial“models” (ie. programmed equity currency trading, quant hedge fundformulas, derivatives markets, etc.) to react in the same timely manneras the individual investor decision-makers in Japan, China, India,wherever. In front of their notebooks and IPods watching the financialtickers flow over the screens, these billions only have to adjust theirindividual preference model in seconds, whereas the hedge fund Quantsand programmed trading superstars have to assembly a committee of‘experts” to analyze the adjustments in the underlying tradingalgorithms to make needed changes to account for the previous tradingdeficiency and variances and make further tweaks to anticipate the nexttrading round. 4. Due to the speed of global financial informationflows + global volume and speed of individual decision/reaction times +global clustering of correlated investment decisions + thecomparatively slower reaction times of centralized quant trading modelsmost likely causes much more leveraged volatility in trading marketsthan centralized financial center leaders want to admit. Thesefactors are leading huge volumes of global individual investors making‘volatile short-terminism' decisions over which no central banks norcentral financial centers have control.