BERND PAPE Asset Allocation, Multivariate Position Based Trading ...

64 ACTA WASAENSIAmarkets dominated by short term rather than long term investors, a point which hasbeen made much earlier by Keynes:It might have been supposed that competition between expert professionals,possessing judgement and knowledge beyond that of the average privateinvestor, would correct the vagaries of the ignorant individual left to himself.It happens, however, that the energies and skill of the professionalinvestor and speculator are mainly occupied otherwise. For most of thesepersons are, in fact, largely concerned, not with making superior long-termforecasts for the probable yield of an investment over its whole life, butwith foreseeing changes in the conventional basis of valuation a short timeahead of the general public. (Keynes 1936: page 154.)Even when arbitrageurs dominate the market, they are more likely to adapt a setof simple strategies than to agree on true values of investments or true probabilitydistributions of stock prices. This point was made already by Alchian (1950) whostresses the importance of positive ex-post profits in contrast to rationally maximizedex-ante profits in the evolutionary struggle for survival. Contrary to the EMH, fullknowledge of the economy is not necessary to survive, aspositive profits accrue to those who are better than their actual competitors,even if the participants are ignorant, intelligent, skilful, etc. The crucialelement is one’s aggregate position relative to actual competitors, not somehypothetically perfect competitors. (Alchian 1950: page 213.)Uncertainty created by a highly complex environment favors then adaptive, simplerules of thumb rather than rationally maximizing behaviour (Alchian 1950: p. 218).The latter point was extensively elaborated by Simon (1957), who showed that decisionmakers in a variety of context act what he termed “boundedly rational” in the sensethat they systematically restrict the use and acquisition of information compared tothat potentially available.