Risk-return predictive software permitted as a sales aid…
Posted By John Schroy On 30th October 2004 @ 22:08 In Economic Theory | Comments Disabled
The SEC has sanctioned the use of risk-return predictive software as a sales aid by NASD registered representatives, as long as disclaimers are displayed.
([1] See PDF file)
Each forecasting tool must be accompanied by a description of the criteria and methodology used, including the tool’s assumptions and limitations.
However, the reverse side of regulation is enforcement and there will be a certain difficulty in dealing with the materiality or adequacy of disclosure of theories that are, in the final analysis, unscientific.
The 10b-5 Daily in “What is an Efficient Market?” discusses how the Efficient Market Hypothesis has already entered the courts.
(See also: [2] The Non Efficient Market).
It is likely that some of these risk-return predictive tools will incorporate techniques of Modern Portfolio Theory, the Capital Asset Pricing Model, or the Black-Scholes option pricing model.
One can only wonder how far securities salesmen will get in explaining the stochastic partial differential equations behind Black-Scholes methodology or the unworldly assumptions that support the non-scientific economic hypotheses sanctified by the Nobel Committee.
Will the fine print on the software package mention practical “limitations” on Black-Scholes suggested by the downfall of Long Term Capital Management?
(See: [3] Fallacies of the Nobel Gods. )
Of course, these predictive techniques have supported securities sales and Wall Street promotion throughout the Great Bubble, but by granting official recognition subject to specific legal restrictions and procedures, the door is now open for interesting law suits as investors lose money and claim that the “description of the criteria and methodology” on the label of these predictive “tools” was inadequate to save their retirement funds.
To see theories on which these “tools” are based argued in court before a jury is something to be eagerly anticipated. As the 10b-5 article cited indicates, in at least one case a court would not go along with “academic” or “economic” definitions of an “efficient market”.
As the [4] Irrationality Axiom
implies, market players may even, from time to time, be rational.
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URL to article: http://capital-flow-analysis.com/capital-flow-watch/risk-return-predictive-software-permitted-as-a-sales-aid.html
URLs in this post:
[1] See PDF file: http://www.sec.gov/rules/sro/nasd/34-50463.pdf
[2] The Non Efficient Market: http://capital-flow-analysis.info/investment-tutorial/lesson_7.html
[3] Fallacies of the Nobel Gods: http://capital-flow-analysis.info/investment-essays/nobel_gods.html
[4] Irrationality Axiom: http://capital-flow-analysis.info/investment-tutorial/lesson_6.html
[5] black scholes: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=black-scholes
[6] efficient market: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=efficient-market
[7] options: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=options
[8] risk: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=risk
[9] SEC: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=sec
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