What Are the Habit Formation Theories of Equity Returns?

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There are habit formation theories of equity returns, right? The notion that the return on equity is so much higher than the return on bonds because if you suffered losses on equity, it would disrupt your habits. Soi i still like tha, here's a question from a reader. Do you now find habit formation theories more or less convincing? I think there's soething deep in that. And when stocks went down in march, i think people were scared as heck,. Whether the mechanism is habits or whether the mechanism is something involving a leverage and arisk bearing capacity in financial markets is less important.

What unites John Cochrane the finance economist and “grumpy” policy blogger with John Cochrane the accomplished glider pilot? For John, the answer is that each derives from the same habit of mind which seeks to reduce things down to a few fundamental principles and a simple logical structure. And thus, piloting a glider can be understood as an application of optimal portfolio theory, and all of monetary policy can be made to fit within the structure of a single equation.

John joined Tyler to apply that habit of mind to a number of puzzles, including why real interest rates don’t equalize across countries, what explains why high trading volumes and active management persist in finance, how the pandemic has affected his opinion of habit formation theories, his fiscal theory of price level and inflation, the danger of a US sovereign debt crisis, why he thinks Bitcoin will eventually die, his idea for health-status insurance, becoming a national gliding champion, how a Renaissance historian for a father and a book translator for a mother shaped him intellectually, what’s causing the leftward drift in economics, the need to increase competition among universities, how he became libertarian, the benefits of blogging, and more.

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Recorded January 4th, 2021 Other ways to connect

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