These are Powerpoint slides prepared for a seminar at ISMed, the Institute for Studies on the Mediterranean, under the aegis the National Research of Italy (CNR). Standard models of finance assume risks are stable, in which case beliefs normally converge smoothly toward the actual risks. In...

The economist Frank Knight is most widely known for his purported identification of uncertainty that is too dimly understood to permit quantification. While often lauded, this identification is doubly mistaken. First, nearly all economic uncertainty can be quantified as willingness to pay, as...

There is substantial evidence from neuroscience and psychology that what we perceive as a unified mind is actually a vast collection of relatively autonomous minds. A decentralized brain appeals from an evolutionary perspective too, as it requires less interconnected wiring than a fully...

Standard financial stress tests are ad hoc. They offer no guidance on how to select the target stress levels, how to adjust for randomness within crisis, or how to integrate the results with other risk measures. The VarGamma metric introduced by Osband (2013) offers an appealing alternative. It...

Energy exports, which are already the primary source of Soviet convertible currency earnings and an important contributor to the budget, could bring in much more revenue if the Soviet Union were to reduce its extremely high levels of energy consumption. To encourage this process, energy prices...

One of the main conclusions of Reinhart and Rogoff's study of sovereign debt crises, highlighted in its title This Time is Different, is that markets for sovereign debt are prone to manic mood swings. When things go well for an extended period, lenders tend to underestimate risks of crisis. They...

Since borrowers want minimal pressure to repay early while depositors want minimal constraints on withdrawals, banks typically borrow short to lend long. This is known as duration mismatch. To mitigate the risks, banks are required to hold capital buffers, which are intended to cover all losses...

Credit grades are ordinal measures of default risk that are used to rank the relative creditworthiness of different borrowers rather than the relative safety of different environments. They are assigned by specialized rating agencies, which face short-term pressures to fudge their rankings and...

Like equity markets, credit markets seem chronically short-sighted. When debt is serviced regularly, creditors seem to get complacent about the risks. When default shocks them out of complacency, they seem to overreact. Reinhart and Rogoff (2009) contended that sovereign debt markets have been...

Standard finance theory has long identified equity investment with aggregate consumption and equity investors with average consumers, while treating most growth risks as iid. The combination makes it impossible to reconcile high equity risk premia with modest risk aversion. Reinterpreting equity...