Stabilization And Sovereign Wealth Funds
by Travis Pantin
Mon, 28 Jan 2008 at 8:22 PM
Spokesmen for sovereign wealth funds have been arguing that the funds are a healthy and stabilizing force in the global economy. Their claim: The funds have a long-term perspective, aren't leveraged, and are willing to buy when others only want to sell.
However, a fellow at the Council on Foreign Relations, Brad Setser, is not entirely convinced.
"It is hard to actually know if sovereign funds act consistently to stabilize markets since the biggest existing funds are also the least transparent funds — and the new funds don't exactly have a track record," he writes.
He admits that sovereign funds currently have the ability to support ailing markets in America and Europe, but he doubts that their presence will be consistently stabilizing. Most market participants have a more ambiguous impact. Hedge funds, for instance, can destabilize a market by piling onto trends.
"Sovereign funds will get into trouble. That is when they risk adding to market volatility," Mr. Setser writes.
Downside of Game Theory
Game theory is widely regarded as one of the greatest contributions to modern social science, but it's not perfect, an associate professor of sociology at the University of Indiana, Fabio Rojas, writes on the Marginal Revolution blog.
"In game theory 101, you assume that people develop optimal strategies in response to other rational actors. … It's hard to imagine most people perform the mental acrobatics of game theory actors," Mr. Rojas writes.
World-class poker players do not use backward induction, or any other kind of game-theory equilibrium analysis, as game theory would predict. Still, they somehow manage to come up with strong strategies.
Mr. Rojas suspects that world-class poker players develop their strategies through an "evolutionary process," rather than rational calculation. As it currently stands, game theory cannot model such a process, and therefore could still be improved significantly, Mr. Rojas writes.
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