Practical Applications of Why Should Asset Management Be Interested in New Economic Thinking?

Abstract

In Why Should Asset Management Be Interested in New Economic Thinking? from the October 2022 issue of The Journal of Portfolio Management, authors Sergio Focardi of Franklin University and Frank Fabozzi of Johns Hopkins University explain that mainstream economic theories may be outdated and may lead asset managers to make bad decisions. Modern-day economies are complex, rapidly evolving systems where inflation, money and credit creation, and economic growth are driven by new and different factors. Moreover, modern economies are complex, evolutionary systems that are not adequately described by traditional models. Mainstream economic models failed to warn markets about the 2008 financial crisis because they did not consider the destabilizing effects of money creation and destruction when bank loans are disbursed or repaid. Additionally, the Phillips curve, which posits an inverse relationship between inflation and unemployment, failed to predict low inflation between the financial crisis and the COVID-19 pandemic. Mainstream models also do not include innovation and quality improvements in economic growth. New and emerging theories offer potentially better insights for predicting when markets will become unstable. These theories embrace different views about the drivers of inflation, the effects of money and credit, and the significance of innovation and qualitative growth. These theories can offer insights that allow asset managers to make better investment decisions.