1 His simple message this time was that irrational exuberance is still a defining feature of how financial markets function. Investors still follow cycles of mania and crashes, rather than rationally calculating the probabilities of all relevant scenarios – and rather than considering the negative externalities of their transactions. Full stop.
This confirms the three truths or crucial lessons to be learned – realities to be accepted ‒ and remembered. First, people are, in the majority of instances, irrational; rational calculation is severely limited – internally, by our limited neurological capacities; and externally, by uncertainty in a complex world. For supervisors this implies that regulation cannot assume rational behaviour, but interconnection and herding behaviour.