Doyne Farmer

So under the theory of market ecology, it's like the theory I said before about the production system and the real economy, but The way you think about it is there's different species of investors and they're all specialized. Warren Buffett does his thing. There's another guy, John Henry. He's a trend follower.

So under the theory of market ecology, it's like the theory I said before about the production system and the real economy, but The way you think about it is there's different species of investors and they're all specialized. Warren Buffett does his thing. There's another guy, John Henry. He's a trend follower.

He says if the market's been going up, it'll keep going up and looks at little patterns in the prices to decide when to buy and sell. You know, they're market makers. You can make a list of, I can easily write down 15 or 20 different types of strategies in financial markets. And While there's variation in how people execute those strategies, they're broadly, it's like species and biology.

He says if the market's been going up, it'll keep going up and looks at little patterns in the prices to decide when to buy and sell. You know, they're market makers. You can make a list of, I can easily write down 15 or 20 different types of strategies in financial markets. And While there's variation in how people execute those strategies, they're broadly, it's like species and biology.

And so under the theory of market ecology, we need to think of the market as an ecosystem with specialized actors. They feed off of the inefficiencies in the market. They are what's making the market efficient, but they never achieve perfect efficiency. We see swings around perfect efficiency, particularly when new stuff happens.

And so under the theory of market ecology, we need to think of the market as an ecosystem with specialized actors. They feed off of the inefficiencies in the market. They are what's making the market efficient, but they never achieve perfect efficiency. We see swings around perfect efficiency, particularly when new stuff happens.

You know, mortgage-backed securities are only one of several examples of new financial instruments that caused bad stuff to happen in markets. And so under that theory, you can then simulate what's going on in markets and understand why markets malfunction. The efficient market theory assumes they work perfectly, so it doesn't give you any insight into why they malfunction.

You know, mortgage-backed securities are only one of several examples of new financial instruments that caused bad stuff to happen in markets. And so under that theory, you can then simulate what's going on in markets and understand why markets malfunction. The efficient market theory assumes they work perfectly, so it doesn't give you any insight into why they malfunction.

It's like the poor old balancing In efficient market theory, it's always straight up. If you want to understand why it deviates from straight up, you have to do something else. And I maintain theory of market ecology is the key. And so that then will allow us, one of the things, to back to your question, regulators, I argue, should be simulating the market.

It's like the poor old balancing In efficient market theory, it's always straight up. If you want to understand why it deviates from straight up, you have to do something else. And I maintain theory of market ecology is the key. And so that then will allow us, one of the things, to back to your question, regulators, I argue, should be simulating the market.

They have all the data to understand the species and who they are and how they interact because they can see what everybody does. And so we could have a standard simulation of markets, and whenever a new financial instrument comes in, we put it in there. It's like an invasive species in ecology, and we test it out to see what its side effects are.

They have all the data to understand the species and who they are and how they interact because they can see what everybody does. And so we could have a standard simulation of markets, and whenever a new financial instrument comes in, we put it in there. It's like an invasive species in ecology, and we test it out to see what its side effects are.

And if we were doing that leading up to the great financial crisis, we would have seen the side effects of mortgage-backed securities used with high leverage.

And if we were doing that leading up to the great financial crisis, we would have seen the side effects of mortgage-backed securities used with high leverage.

Well, I'm actually trying to convince the SEC because central banks, as a central bank, you only see your part of the story. You know your positions. You don't know what everybody else is doing. But the SEC can look at anything it wants to. and does whenever something goes haywire. Okay, that makes sense.

Well, I'm actually trying to convince the SEC because central banks, as a central bank, you only see your part of the story. You know your positions. You don't know what everybody else is doing. But the SEC can look at anything it wants to. and does whenever something goes haywire. Okay, that makes sense.

So the data could just be flowing in, they could be simulating what's happening, and they could be doing counterfactual experiments. So do we need to be worried about leverage getting too high here? Crank it up. Oh, wait a minute. We got to get people to lower their leverage.

So the data could just be flowing in, they could be simulating what's happening, and they could be doing counterfactual experiments. So do we need to be worried about leverage getting too high here? Crank it up. Oh, wait a minute. We got to get people to lower their leverage.

Yeah. Well, they've certainly been helped by that. You know, in my career, I've always had the problem that I never fit into any discipline. So I'm one of the most interdisciplinary people around because I've straddled disciplines without being in one. through my whole career. And by the way, you said, oh, you're at Oxford, but actually I'm in the Department of Geography and the Environment.

Yeah. Well, they've certainly been helped by that. You know, in my career, I've always had the problem that I never fit into any discipline. So I'm one of the most interdisciplinary people around because I've straddled disciplines without being in one. through my whole career. And by the way, you said, oh, you're at Oxford, but actually I'm in the Department of Geography and the Environment.