From an article by Eric Lonergan at Philosophy of Money: When asked what the biggest bubble is out there, I point to "volatility". Not low or high volatility. But the very concept. Volatility-based frameworks are omnipresent. Portfolio risk is measured using value-at-risk models that attempt to capture the volatility of a portfolio, and specify probable losses with varying degrees of statistical confidence. Investors everywhere are being encouraged to define their "risk profile". This translates into constructing portfolios which target levels of volatility – the risk-averse are encouraged to invest in less volatile funds, the risk-takers are to move higher up the volatility spectrum. Every corner of the investment industry is obsessed with volatility. The first of three significant problems with this intellectual virus is typically unrecognised: investor behaviour is becoming correlated. That’s jargon for saying more people are behaving in exactly the same way … one of the most com...
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