About the Author

My name is Kevin Erdmann.  This blog broadly covers the topics of economics, finance and speculation.  I have an MS in Finance from the University of Arizona.  I am currently writing and supporting books about the housing bubble and the financial crisis which are being published through the Mercatus Center.

In investing and speculating, if someone earns excess returns, the question always remains, (1) did they develop profitable positions through deep research and novel conceptual insights or (2) were they fooled by randomness into thinking they have novel conceptual insights.

One possible explanation for a non-random outcome is that in addition to financial risk, there are also many other forms of risk, including regulatory and reputational risk.  In some unusual contexts, it is possible that reputational risks become so powerful that the required rate of return on a position can exceed the typical levels by an order of magnitude.  These positions tend to have a high level of expected and experienced variance in returns.  But, the expected present value can be enormous for a skilled investor with no agency issues and no reputation to risk.  In short, putting yourself in a position where you might be roundly embarrassed by your public positions can be very profitable.

I hope that enough of you choose to engage with my blog that we can develop a conversation about ideas and investments.  But, you should note that my vocation is to commit to ideas that may seem horribly wrong in foresight.  I intend that few of them will be horribly wrong in hindsight, but inevitably some will be.  I suppose that taking positions which are reputationally risky isn't the best way to build a readership.  If you are reading, it probably means you hold a generous amount of intellectual forgiveness, which I appreciate.  If you comment, I will try to return the favor.

Normally, I would expect the sort of analysis I describe here to be limited to small, illiquid securities.  However, I have been led to create an entire new framework for thinking about the housing bubble and the financial crisis.  And, it may be that I was the only person willing to say something so stupid as "There weren't enough houses in 2005."  And, it turns out that this may seem horribly wrong in foresight, but may be correct in hindsight.  Or, maybe it's just horribly wrong.  In either case, it has become the focus of the blog.

No comments:

Post a Comment