Perhaps there is some hope for other industry segments to change as the

Perhaps there is some hope for other industry

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calculations. Perhaps there is some hope for other industry segments to change as the financial sector has. Bernstein points out that, "Despite all this turmoil, Capital Ideas have developed into orthodox operating procedures in the daily management of investment portfolios and trading activity in the financial markets all around the globe." The total notional value of outstanding derivatives at the end of 2006 had reached $370 trillion. Where could insurance go if it underwent the same type of innovation? After this excellent preface, Bernstein divides the book into three main sections. The first part covers what he calls "The Behavioral
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Attack". In these chapters, he covers the theories of the behavioralists such as Daniel Kahneman and Amos Tversky. Given that the proponents of this theory have used it to contradict Capital Ideas, one might expect that the author would give their theories short shrift. He does not. I am a very big fan of the work of Kahneman and Tversky. Much of the Stanford work that I often cite is effective precisely because it employs their work. So I am particularly sensitive to any attacks against my heroes. Bernstein overlooks some of the value that can be derived from the behavioralists, which is unfortunate. When one is trying to create statistical models, or to predict human behavior in some circumstances, their work is extremely helpful. Expert elicitation is probably the best method for predicting future outcomes when there is little or no data. But this is far outside of the scope of Capital Ideas Evolving and so I think the author can be forgiven. Bernstein also points out the real world weakness of these theories as they apply to the financial markets. If indeed people are so poor at making decisions due to their many biases, why can't one make a killing in the market by exploiting these weaknesses? If, for example, people made bad investment decisions 70% of the time, why then would one not be able to beat the market by using computer based decision making that is not subject to these biases? (This is roughly the same question posed above regarding the insurance market, by the way.) Part two of the book investigates what some of the giants of Wall Street are doing now and how the behavioral sciences as well as Capital Ideas have impacted them. This section includes in depth interviews with the likes of Scholes and Merton among others giants of the field. The valuable insights captured in these interviews are too frequent to cover in a meaningful way here. I found innumerable quotable insights. I found that every page or so my mind was stimulated to develop some new form of risk transfer product or to look at risk management in a new way. The interview with Myron Scholes in particular had me re- engineering the entire insurance industry in my mind as I read.
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