April 18, 2014
November 8, 2012 at 5p.m.
Bill Janeway
Institute for New Economic Thinking

Reasoning about Rationality: Why Bubbles are both Banal and Necessary

The persistent recurrence of speculative excess is a defining feature of financial capitalism wherever and whenever investors are flush with cash to invest in liquid secondary markets in financial assets. Historically, the appearance of bubbles transcends both political regimes and market structures. Comprehending this is the first and critical step to grasping how capitalism works. The second step cuts against the bulk of the literature on the wastefulness of bubbles and the inevitable crashes that follow; it is to recognize the role that financial speculation has played in funding the episodic deployment of revolutionary technology at systemic scale. The third step is to understand that the phenomenon of bubbles challenges received doctrines of neoclassical economics: the dual hypotheses of efficient markets and rational expectations. Understanding the dynamics of bubbles depends on reasoning about rationality in a universe characterized by inescapable ontological uncertainty.


William H. Janeway has lived a double life of "theorist-practitioner," according to the legendary economist Hyman Minsky who first applied that term to him twenty-five years ago. In his role as "practitioner," Bill Janeway has been an active venture capital investor for more than 40 years. During that time he built and led the Warburg Pincus Technology Investment team that provided financial backing to a series of companies making critical contributions to the internet economy, including BEA Systems, Veritas Software and, more recently, Nuance Communications, the speech recognition company. He remains actively engaged as a Senior Advisor and Managing Director at Warburg Pincus.

As a "theorist," Janeway received a Ph.D in Economics from Cambridge University where he was a Marshall Scholar. His doctoral study on the formulation of economic policy following the Great Crash of 1929 was supervised by Keynes' leading student, Richard Kahn (author of the foundational paper on "the multiplier"). Janeway went on to found the Cambridge Endowment for Research in Finance. Currently he serves as a Teaching Visitor at the Princeton University Economics Department and Visiting Scholar in the Economics Faculty of Cambridge University.

Janeway is a director of Magnet Systems, Nuance Communications, O'Reilly Media and a member of the Board of Managers of Roubini Global Economics. He is a member of the board of directors of the Social Science Research Council, and a co-founder and member of the Governing Board of the Institute for New Economic Thinking (INET).