Tyler Cowen: belief

Transcript context

…Yeah. Okay, so we can ask the question, how far above optimal are we? Or if we are above optimal? In the chapter, Keynes says that over time, as markets get more mature, they become more speculative. And the example he gives is like, the New York market seems more speculative to him than the London market at that time. But today, finance is 8% of GDP. Is that what we should expect it to be to efficiently allocate capital? Is there some reason we can just look at that number and say that that’s too big? I think the relevant number for the financial sector is what percentage it is of wealth, not GDP. So you’re managing wealth, and the financial sector has been a pretty constant 2% of wealth for a few decades in the United States, with bumps. Obviously, 2008 matters, but it’s more or less 2%, and that makes it sound a lot less sinister. It’s not actually growing at the expense of something and eating up the economy. So you would prefer it’s less than 2%? Right. But 2% does not sound outrageously high to me. And if the ratio of wealth to GDP grows over time, which it tends to do when you have durable capital and no major wars. The financial sector will grow relative to GDP. But again, that’s not sinister. Think of it in terms of wealth. I see. So one way to think about it is like the management cost as a fraction of the assets under management or something. And that’s right. In that case, 2% is not that bad. Yeah. Okay, interesting. I want to go back to the risk aversion thing again, because I don’t know how to think about this. So his whole thing is these animal spirits, they guide us to make all these bets and engage in all this activity. In some sense, he’s saying, like, not only are we not risk-neutral, but we’re more risk-seeking than is rational. Whereas the way you’d conventionally think about it is that humans are risk-averse, right. They prefer to take less risk than is rational in some sense. How do we square this?…

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