The great risk shift

I’ve spent the last couple of days at a workshop sponsored by the Academy of the Social Sciences in Australia on shifting allocations of risk. Most of the papers were well underway when the collapse of global financial markets implied the need for a radical revision of thinking. So a lot of discussion was prefaced with “at least until the onset of the crisis, this trend was ….” Here’s my paper.

26 thoughts on “The great risk shift

  1. As for the debate on the Efficient Markets Hypothesis, or the notion that market values of assets are the most reliable guide to underlying value available, I would say the one area at the moment where market values are most out of whack is the housing market.

    I don’t think any sensible person who doesn’t have a vested interest doubts that housing prices are seriously overvalued, and are not a reliable guide to the underlying value of housing.

    But in this case there are a couple of factors that explain it:
    – governments have distorted the market through favourable tax treatment for housing (including CGT exemption for primary residence), as well as the high costs of government charges in building new homes which put a floor under house prices
    – because many average homebuyers tend to be less knowledgeable on financial matters than those who purchase other investments, the market is less well-informed
    – housing is often more a lifestyle matter than a rational investment decision

    The tax breaks are particularly significant, in that tax minimisation often has an irrational appeal. People will often chase tax breaks even if investments turn out to be duds and lose more value than what the tax break is worth.

    This is one case where the EMH does not work. But I think it is atypical compared to other markets, because of higher government distortion and the ignorance of purchasers.

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