Posts Tagged ‘Risk

23
Oct
08

The Icelandic meltdown and dilettantism of finacial markets

So how can we calculate the absolute risk aversion in the Icelandic banking industry?—As the curvature of u(c) increases, so does one’s aversion to risk..Outside of those parameters I’m lost.

r_u(c)=-\frac{u''(c)}{u'(c)}

It’s funny because if you don’t study history you get the great opportunity of repeating it..1,000 years ago Icelanders left Scandinavia in search of freedom and a better life far away from Medieval feudal establishment. Combine this cultural risk-seeking behavior with a desire to be modern, and a neo-culture of inflation and debt, and we begin to see the very underpinnings of a financial meltdown.

The people are industrious and dynamic, and they have a tendency to take on tasks that are beyond them. The current prime minister used to be the foreign minister and he also happened to be the minister of finance – at the time when the head of the central bank, who also did a stint as foreign minster, was the prime minister, and the current finance minister was serving office as minister of fisheries.

Now things are almost back to the way they were in the 80s: the inflation rate is almost double-digit; the state controls the banks and rations currency exchange. All we need now is to re-introduce the beer-ban, and it will look as if the Icelanders want to start the process of globalisation all over again.

Read the entire article via Financial Times Deutschland.

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