Monday, January 04, 2010
The Mad Hatter on Contract Design
As an aficionado of absurdity, I certainly enjoy the following provision in the contract I just accepted in order to get internet access so as to post this for my faithful and dearly appreciated readers:
Ha ha ha! You’ve got to appreciate such nonsense and such chutzpah.
The efficient market hypothesis/ratex people seem to think that the financial crisis stemmed from an unforeseeable "black swan." Some of the Keynesians think it stemmed from irrationality and animal spirits. Both are, I guess, explanations for why all those contracts that comprise mortgage backed securities went toxic. But how about this as an alternative explanation: people intentionally design bad contracts to give themselves the upper hand in exchanges.