Sublime

One conceit of economics is that markets as a whole can perform fairly rationally, even if many of the participants within them are irrational. But irrational behavior in the markets may result precisely because individuals are responding rationally according to their incentives. So long as most traders are judged on the basis of short-term

emergent phenomena, ergodicity, radical uncertainty, and computational irreducibility.

Striking the right balance between individual risk and systemic risk is a key challenge for regulators.

Some highlights have been hidden or truncated due to export limits.

In that sense, it probably is better to err on the high side, as long as the error is not so large that it puts the profit of the product in jeopardy.

However, as powerful as the theory claims to be, it comes with a few qualifications. The most important is that it pertains to returns on a risk-adjusted basis. Suppose you pursue an investment strategy that entails a 10 percent chance of going broke every year. This is exceptionally foolish—if you followed the strategy over a twenty-year

we should be wary of small amounts in such situations, because the effects indicated by prospect theory diminish. It’s probably better to pay someone back $10 at once rather than pay them $1 over 10 periods. It can also make more sense for a newspaper to receive a subscription payment as a lump sum (say $360) than receive its money in 12 equal