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A Story Greenspan Would Not Tell

May 11, 2004

Dinner speech by Professor Otmar Issing, Member of the ECB Executive Board, to be held on Monday, May 10, 2004:

Let me conclude my remarks tonight by asking the question – somewhat in line with behavioural finance – what’s so terribly “wrong” with financial markets, that we have to mind so much about them. The answer is of course deeply rooted in some basic features of human behaviour, which to some extent at least are well illustrated in the following story that plays in the United States.
The winter is approaching in a western state of the US, and the chief of a tribe of Native American Indians is wondering how to prepare for it. So he calls a junior member of his tribe to collect fire wood in the forests. The young man asks the chief how much wood was needed for the coming winter. The chief ponders about this important question and conservative as he is advises the fellow to gather just a little bit more than what was burned during the preceding winter. The young man goes in the forest, comes back with the wood and asks the chief whether the amount he brought was enough. The chief ponders about this important question and decides to call the government weather forecast service to be on the safe side. The service informs him that according to their forecast the weather will just be a little bit colder than last year. So, the chief instructs his fellow to go back in the forest to collect some more wood. The fellow does it and upon return asks whether it was now enough for the winter. The chief again takes the phone and checks the latest weather forecast. He receives the answer that according to the latest information the winter will be significantly colder than last year. So, the “ceremony” repeats itself and his fellow has to have another trip to the woods and upon return the chief again checks with the government weather service. Now the news is that this year’s winter will be extraordinarily cold. The chief is astonished and impressed and asks the lady on the phone, how is it possible that you know this so accurately. The lady paused a moment whether she was authorised to provide this information and then answered that her colleagues had reported that Native American Indians were collecting a lot of wood in the forest…

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