An Evaluation of Financial Markets in Naked Economics

What the financial markets of today is really a more efficient, sophisticated way of making individuals better off since the dawn of capitalism—raising capital, storing it, protecting it, and using it to make profit. Financial markets have innovations like the advent of computer that dramatically increases the frequency of trade, but the basic principles are the same. Harvard’s endowment is the perfect example—instead of hoarding its money, it can invest it and make more money.

While investment is risky, insurance mitigates some of those risks, although insurance itself can be the source of risk, as with credit default swaps.

If the party that owes the money continually defaults, then the third-party that enters those credit default swaps lose money. Catastrophe bonds also is a form of insurance, and like credit default swaps, spread out the risk among many investors. Paying a profit to holders of insurance bonds if there is no natural disaster is perfect for insurance companies, considering that they would lose no money if there happens to be a natural disaster.

Insurance exists because it creates high returns for those who profit off of it, which is the point of financial markets.

People are in financial markets to make money, leading to a theoretically efficient market because everyone has access to the same amount of information. Except those who can access the best expertise and research, because everyone has the same amount of information, barring illegal trading information, the market is efficient to the point that index funds often outperform actively managed equity funds.

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Except for people like Warren Buffet, consistently besting the market average is uncommon. Diversifying stocks is another way to spread risk. In all, the finance market has very few, if any, shortcuts to make money-money is usually made when the market goes up as a whole.

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An Evaluation of Financial Markets in Naked Economics. (2023, May 16). Retrieved from

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