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Investing and economics
How prices form, why markets get it wrong, and what not knowing that costs you.
The reading track
- 01
Collective decisions can be more accurate than individual ones, but only if the group is diverse, independent, and decentralized.
The Wisdom of Crowds · James Surowiecki · 2004
Surowiecki shows that crowds can make good decisions when each member uses their own information, without being influenced by others. For example, in a famous experiment, people estimated the weight of an ox; the average of individual estimates was nearly perfect, though no one guessed exactly. Conversely, when people copy each other's opinions, the group can reach poor conclusions, as happens in speculative bubbles. A financial market works well when participants have diverse information and act independently. When everyone follows the same signal or the same leader, the risk of collective error arises.
Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest person in them.Introduction, 'The Wisdom of Crowds'
Why it matters The reader's question 'Why do speculative bubbles repeat?' finds an answer here: bubbles occur when independence of judgment is lost, and the crowd becomes a herd, exactly as this week's volatility spikes show.
- 02
The price of a financial asset should reflect the future income streams it will generate, not just speculative market movements.
The Theory of Investment Value · John Burr Williams · 1938
Williams introduced the concept of intrinsic value, calculated by discounting all future income an investor can receive from an asset. For a stock, this income is dividends. The discount rate reflects risk and inflation. If the market price is much higher than this intrinsic value, the asset is overvalued; if lower, it is undervalued. In practice, this theory underpins fundamental analysis. For example, a company with stable profits and consistent dividends will have a higher intrinsic value than one with volatile earnings, even if their market prices are temporarily similar.
The intrinsic value of a security is the present value of all future dividends, discounted at an appropriate rate of interest.Chapter 1, 'Introduction'
Why it matters The volatility spikes at INFINITY and SOCEP, in the absence of fundamental news, suggest a disconnect between price and intrinsic value, exactly what Williams theorizes.
- 03
Relevant economic knowledge is dispersed across millions of minds and can never be gathered in one place; the price system is the mechanism that transmits these scattered fragments.
The Use of Knowledge in Society · Friedrich A. Hayek · 1945
Hayek argues that the central problem of economics is not allocating given resources but using knowledge that no one possesses in full. Much of it is tacit and local: a trader knows a machine is broken, a warehouse keeper knows a good has another use. No committee can assemble these details, but the price system condenses them: when something becomes scarce, the price rises and everyone adjusts without knowing why. Hayek's example is tin on the world market — a local supply disruption propagates through price, and users cut consumption without ever learning the cause. Price works as a signal, not as an explanation.
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.eseul «The Use of Knowledge in Society», American Economic Review, vol. XXXV, nr. 4, paragraful de deschidere
Why it matters When a price moves suddenly and no one can find the cause, Hayek's idea reminds us that price can transmit dispersed information that no news item can immediately verify.
- 04
Your mind has two ways of thinking — one fast and instinctive, one slow and careful — and the fast one often tricks us without our noticing.
Thinking, Fast and Slow · Daniel Kahneman · 2011
If someone suddenly throws a ball at you, your hand reacts without thinking — that is the fast mind. But solving a math problem needs the slow mind, which takes real effort. Kahneman showed that the fast mind uses shortcuts that feel logical but often lead us into mistakes.
Why it matters His ideas now shape how banks and governments design forms and warnings.
- 05
The most important events in history are rarely the predictable ones — they are the huge, rare surprises nobody saw coming.
The Black Swan · Nassim Nicholas Taleb · 2007
For centuries, Europeans believed all swans were white, because that was all they had ever seen. Then someone found a black swan in Australia, and the whole rule collapsed instantly. Taleb calls these rare, huge events black swans — the ones past experience never prepares us to expect.
A Black Swan is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable in retrospect.The Black Swan (2007), capitolul 1
Why it matters The idea has become a standard tool in financial risk management and insurance.
- 06
A community can manage a shared resource — a forest, an irrigation canal — together, without needing either the state or a single private owner.
Governing the Commons · Elinor Ostrom · 1990
Many believed that if a pasture belongs to everyone, each person brings too many cows and the grass runs out for all. Ostrom studied real villages worldwide and found local rules, written by the people themselves, that prevented exactly this problem. Communities can make good rules, if allowed to.
Instead of there being a single solution to a single problem, I argue that a great variety of institutional arrangements can work to manage common-pool resources.Governing the Commons: The Evolution of Institutions for Collective Action, Chapter 1
Why it matters Her work earned the first Nobel Prize in Economics ever given to a woman.
- 07
The baker does not make your bread out of kindness but for his own profit — and that self-interest, through the market, ends up feeding the whole town.
The Wealth of Nations · Adam Smith · 1776
Every seller wants to earn money, so they try to make good products at a good price so you choose them. Without anyone planning it directly, the whole town ends up fed, clothed, and supplied. Smith called this the invisible hand of the free market.
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
Why it matters The idea remains the core argument for market economies around the world.
- 08
When people get scared and suddenly stop spending, the economy can get stuck at a low level, and the government can help by spending itself.
The General Theory of Employment, Interest and Money · John Maynard Keynes · 1936
If all your neighbors suddenly decide to stop buying anything, shops sell less and lay people off. Those people then spend even less. Keynes showed that at such moments, the government can break this cycle by paying for roads or schools, putting money back into people's pockets.
Why it matters Governments used exactly this idea during the 2008 and 2020 economic crises.
- 09
When a single government tries to plan every detail of the economy, it risks gathering so much power that ordinary people's freedom shrinks step by step.
The Road to Serfdom · Friedrich Hayek · 1944
Hayek compared a planned economy to a classroom where one student decides everything for the rest — what they eat, read, or do. It looks organized at first, but that one student cannot know what everyone else knows together. Hayek feared this excessive control gradually leads to a loss of freedom.
Why it matters The debate over how much the state should intervene still shapes economic policy today.
- 10
People buy expensive things not because they are better, but to show they have money.
The Theory of the Leisure Class · Thorstein Veblen · 1899
Imagine a classmate who buys a backpack with a huge logo, even though a simple one does the same job. He doesn't buy the backpack to carry books, but to tell everyone: 'Look how rich I am!' Economists call this 'conspicuous consumption'.
Why it matters This idea explains why ads and fashion influence our spending, even in times of crisis.