The financial crisis that has engulfed the world in the past two years is not just, or perhaps even mainly, a tale of greed run riot; it is the result of an idea that failed. That idea, which over the past four decades became the dominant belief among those generally regarded as the savviest participants in the financial system, was that the market is rational and efficient. So much for that.rnThe idea first took hold among a generation of economists repelled by the heavy government oversight of financial markets imposed during the New Deal era and by evidence of widespread irrational behaviour by participants in these markets. At the same time they were excited by the advances in mathematical economics and the computing power that allowed market data to be analysed like never before.
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