On Risk Aversion

Felix Salmon submits: I've been thinking a bit more about the downside of risk aversion, which is something that Steve Waldman brought up yesterday and which I then applied to the ARS fiasco, among other things. The problem is that it's entirely natural, even when it isn't a good thing, and so I've been wondering a little a related question: given that risk aversion has always been around, how has capitalism dealt with it in the past? Recall that it was too much risk aversion (it even had a name: "portfolio insurance") which caused the 1987 stock-market crash. And it's too much risk aversion which causes any kind of liquidity crisis, from a generalized reluctance to lend all the way to an outright bank run.Complete Story »