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Figuring out Finance

Dr. George BraguesDr. George Bragues, Assistant Vice-Provost and Program Head, Business

Volatility has returned to the world’s financial markets. China’s stock market has lately gone into free-fall, a collapse that has shaken financial marts around the world. Canada has not escaped this turbulence, with Toronto’s stock market having come under pressure over the past month. At times like these, it is worthwhile to step back and reflect on the way that financial markets work.

A recently published work by Dr. George Bragues helps us do just that. The Assistant Vice-Provost and Program Head of Business at the University of Guelph-Humber, Dr. Bragues explores the nature of finance in an article entitled “Towards an Austrian Theory of Finance”. It is included in the latest issue of The Journal of Prices and Markets.

Dr. Bragues explores four pillars of contemporary finance. These consist of four core ideas that students learn about when they take an investments course. Among these ideas is the claim that investors benefit from diversifying their portfolio. Investor are better off, in other words, not putting all their eggs in one basket.

Another core idea is the claim that markets immediately reflect all available information in security prices. So as soon as news comes out about a company, its stock price immediately changes to a new level that takes in the import of that information. The upshot is that investors always get what they pay for in the markets.

Dr. Bragues analyzes these and other principles of contemporary finance under the lens of the Austrian school of economics. This is a way of approaching economic life that stresses the uncertainty of the future. It also lays emphasis on the continual search for profit opportunities by market participants.  

“Austrian economists don’t think there is ever a situation where stock prices are exactly right”, Dr. Bragues says.

He adds: “There’s always some piece of information, some bit of data, out there that a sharp-eyed investor can take advantage of to scoop up a bargain or sell an over-priced stock.”

Asked what he’d like readers to primarily take away from his article: “Well, I’d say it is the point that markets are not perfectly rational at any given moment. But they are always tending towards rationality.”

Dr. Bragues’ article can be downloaded at the website of The Journal of Prices and Markets: