public baselining – stock market and CAPM

One of the truly underappreciated effects of the Capital Asset Pricing Model (CAPM) is that it created a “whole market” baseline against which really large numbers of people began benchmarking returns.

And the historical returns of the US stock market has been around 10% since 1929.

So there is a massive amount of expectations-generation around that 10% return benchmark. This expectation creates incentives to keep innovating NOT as a way to increase the availability of credit, or allow more people to buy homes, or to generate more GDP output, but to generate returns above 10%. All of those other reasons are justifications for financial innovation, not instigation for it.

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