1/
The most seductive tool in finance is leverage.

Increase it and your expected wealth goes up.

Your time-average wealth eventually goes down, but that's not in textbooks, regulations, due diligence.

Get lucky get really rich; otherwise (clients) lose.
youtu.be/CCLtQHL-VUs?t=547

2/
I first realized this when I started thinking about ergodicity and finance in 2007. And what a time to notice it!
I looked on in horror as the leverage bubble that was US housing led to global financial meltdown.
Weirdly, just as I'd expected.

3/
4 years later my paper pointing this out was published: that optimal leverage can be derived from ergodicity considerations, nothing to do with utility.
doi.org/10.1080/14697688.2010.513338

In that paper I predicted a fundamental principle of market organization: leverage efficiency.

4/
If the stochastic properties of a market make it optimal to leverage up (or to short-sell), then that's optimal for everyone, and eventually everyone will try to do it. That's unstable and will eventually lead to a reversal.

5/
I thought this was worth testing: is there evidence in market data for self-organization to a leverage-efficient state?
This is not classic "market efficiency" whereby "prices reflect information" (which cannot be tested). No, my prediction was testable.

6/
I suggested such a test to @alex_adamou as a little side project. Alex was getting bored of sports betting, and I wanted a collaborator. The results were astonishing. Yes, markets do tend towards leverage efficiency.
arxiv.org/abs/1101.4548

7/
I have no good explanation for why we were not allowed to publish this. It has been called the most important result in finance theory by people in the know. The journals we sent it to didn't want it.

/8
Leverage efficiency solves the "excess-volatility puzzle" or "equity premium puzzle," yet most students, regulators, and practitioner don't know about this fundamental organizing principle.

Funds keep blowing up, policy gets mis-designed, people lose.

We can do better.