Jamesian Philosophy Refreshed

  We have travelled a long way. A look back is a good way to end a journey. We began with a discussion of some of the concepts essential to any discussion of contemporary finance. Why do stock prices move? Do they move randomly? We discussed the fact that modern finance theory has long used the bell curve as a randomness base line. Related to this, we said that the efficiency of markets, built as it is upon their liquidity and transparency, as well as the fact that a lot of very smart people are looking for an edge in competition with one another, is an adequate explanation for random movements, but that inefficiencies of inefficiencies of markets, which show up as skewed or otherwise non-normal curves, require other explanations. From there we moved to the questions: how stock options derive their value? And, what are the defining facts about bonds, either corporate or sovereign? We also discussed accounting, and so the balance-sheet difference between stock...

Some more thoughts lifted from my ongoing work on my next book. -----------------------  The term “pyramid scheme” is sometimes used loosely as a synonym for “Ponzi scheme,” and their meanings are related, but they are in principle distinct. A pyramid scheme is a business model in which payments are promised to one level of participants for the act in bringing in another level of participants. You, dear reader, have no doubt received the simplest form of a pyramid pitch as chain letters or their e-mailed equivalents. “Send me a dollar. Also, send out six copies of this email to friends of yours, You will get $6 as a return on your $1 investment.” Each of those six people will soon be in the same situation if you comply. It isn’t exactly a Ponzi scheme, although it shares the unsustainability thereof. What’s the difference exactly? In a pyramid scheme, the originator can make a clean get-away. Once you’ve found your own six suckers, you’ve made your profit and the ...