Tuesday, January 5, 2010

Investing Term Tuesday: Riskless Society.

A riskless society is a fictional society where the markets of the world are sophisticated enough to anticipate and mitigate any and all risks. While the idea is credited to Dr. Kenneth Arrow and Gerard Debreu, it is similar to one of Einstein's famous thought experiments, where the thinker hypothesizes an imaginary situation for the purpose of examining various "what if" scenarios. In the case of the riskless society concept, it has led to improvement in theories of risk management.

The idea of a riskless society is based on assumptions of an efficient market which is said to be in equilibrium; a clearly imaginative scenario compared to empirical data of real world markets. Riskless society theories are used by people who study behavioral finance.


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