SlideShare a Scribd company logo
Masterclass by Rupesh Parikh
Would you rather:
a) Receive £450 in cash now
b) Have 50% chance of receiving £1000, but
also 50% chance of receiving nothing
Would you rather:
a) Lose £450 in cash now
b) Have 50% chance of losing £1000, but also
50% chance of losing nothing
Are economists' assumptions
good approximations of real
people's behaviour?
Trader and Broker
Reported abnormally
large returns of 5.6% in
2008
 $36bn transferred into
his fund
 SCAM
 Collapse


Run by Merton and
Scholes
 Nobel Prize winners for
theory of market
manoeuvres regarding
US and Soviet bonds
 Market did not act as
empirical suggestions
denoted
 Bankruptcy

Actuary / Quant
Mathematical
correlation theory
(Gaussian Copula)
 Assumed that market
would function at all
times
 Aggregate changed –
but the model didn’t
 Collapse


Decisions often made
out of a spontaneous
urge to react
 Cornerstone of
economic theory is
consumer confidence
 The key, therefore, is
to revive confidence in
markets.
 This should not tip
over to arrogance!

Economic Froth driven
by human behaviour
acting irrationally
 Bubbles are created –
don’t match the law of
demand!





Greed ? Is it an animal spirit?
Was it rational to start selling sub-prime?
Was it a good idea invest in a bubble based
on other people’s investment?


http://www.youtube.com/watch?v=bx_LWm6
_6tA

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Behavioural Economics