Barber Helps Campus Understand the Economic Crisis
Former Federal Reserve Chairman Alan Greenspan has called the current global financial crisis a “once-in-a-century” event. To help put the economic turmoil in historical perspective and shed light on market behavior over the long term, Professor Brad Barber joined a panel of UC Davis faculty experts at “Understanding the Financial Crisis,” an October 17 forum hosted by the UC Davis Institute of Governmental Affairs.
The panel included Alan Taylor, professor of economics and director of the Center for the Evolution of the Global Economy and Eric Rauchway, professor of history and director of the Society for History Society and Culture. The panel agreed that many aspects of this crisis are repeats of history and that the government bailout was a necessary reaction to the current situation. However, the panelists voiced concern that the bailout plan does not have enough regulatory teeth and in the end Americans will get little return.
Barber focused on the anatomy of bear markets, contending that the market is dynamic and has always experienced highs and lows. He said individual financial decisions hold both risks and rewards. Barber showed that over the long term, the total stock market has returned substantial value, despite repeated peaks and valleys.
Breaking Down Paradigms at Prestigious Santa Fe Institute
As an authority on investor psychology and behavior, Barber was among an eclectic group of innovative environmental biologists, physicists, ecologists and economists from the U.S. and abroad brought together by the Santa Fe Institute last summer for a week-long colloquium titled “First Steps toward Understanding Market Ecologies.”
The institute’s primary interest is to break down common paradigms in understanding the world and promote unconventional approaches to gathering knowledge and solving problems. Research methodologies ranged from ecological understandings of market behavior to microeconomics.
Among those at the July 28- August 1 meeting was George Sorros, a successful speculator, philanthropist and political activist, whose interests include funding transformative research. He is known to be critical of traditional economic modeling in regards to understanding markets and supports innovative research like Barber’s. Other participants included Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management, and John Geanakoplos, professor of economics at Yale University.
Barber’s research is a deductive approach to understanding markets motivated by general economic theories of how financial markets work, while other researchers at the conference use a more bottom-up inductive approach based on empirical observation of market participants. Barber presented his research on Taiwan’s financial markets, which was based on his article in The Review of Financial Studies, published in April 2008. Barber and his co-authors analyzed the behavior of equity traders, including day traders, in Taiwan’s stock market, the world’s12th largest. According to his findings, some common behaviors that promote individual losses are traders’ overconfidence, aggressive buying behavior and unrealistic impressions of their knowledge about the market.