Rubin’s In Uncertain World’s Chapter 12

Greed, Fear, and Complacency


Rubin’s back to financial market to Citigroup and his observation on the nature of investors/financial markets. He experienced bullish market in the late 1999 to around 2001, and the reversing trend after 2002.

His observation (only the ones relevant to study guide questions):

1. Investors behavior is rather exuberance, short term, and overly optimistic in 1990s. He sounds more like Keynesian, in believing that investors have shortsightedness in forming expectation and using rather too limited information. They do not follow Lucas “rational expectation”/market clearing efficiency, but more “sticky” assets price.

2.They are also subject to herd behavior, “if the market continuous to rise, and I am not participating, I am losing my job. If the market fails, we fails together” – a sort of prisoner dilemma problem, too. The “reversed” stag hunting behavior, when the Nash equilibrium is to act exuberantly (aggressive optimism), and when cooperation is less “scary”

3.In technological change (due to dot-com bubble), Rubin is skeptical. It is also related to his belief that business cycle is still there (despite then the idea for the end of business cycle during bullish market). In Business Cycle, he doesn’t seem to share neither RBC (as he doesn’t think technological changes significantly happens), nor Friedman/Lucas on anticipated/unanticipated market shock; but rather on Keynesian approach as he said that “…business cycle remain, because the constants of human nature, such as greed, fear and complacency…” and “…in my view, the change in market price and market psychology was far greater than the change in the underlying economic realities..” –comment on why bullish market turned bearish after 2001.

4. Rubin, as Citigroup’s big shot, is aware in the problem of “government” commitment. In his remark on the possibly devastating risk of remote contingency, he cited his experience in Goldman Sachs when he correctly prevented his colleague in taking large position of government backed farm credit bonds (Farmer Mac), since he knew that it is likely that government declines to stand by its commitment to support that bond scheme.

Hope it helps, and comments are welcomed.