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Lafta
climber
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Jan 17, 2009 - 03:53pm PT
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Wow! Some peeps here are waking up!
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graniteclimber
Trad climber
Nowhere
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Jan 17, 2009 - 04:07pm PT
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" Economics is the business version of Religion."
It's more like weather forcasting.
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Moof
Big Wall climber
A cube at my soul sucking job in Oregon
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Jan 18, 2009 - 12:08am PT
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Listen to a handful of Econtalk podcasts. It will blow your f'ing mind. Them god damn economists are morally twisted mofo's, and don't have a clue how the world works (each contradicts the last). It will truly make you scared as to who we let pass out 350 Billion, and who has the ear of our next president for the next 1-1.3 Trillion worth. We are f*#ked.
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rockermike
Mountain climber
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Jan 18, 2009 - 02:05am PT
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I don't think they are nuts, nor do I think their math is wrong. But in an infinitely complicated world they have to make "simplifying assumptions", and, as Talib points out, some of those assumptions are killers.
A couple of years back I was sent out to Chicago to train on some asset/liability management software - an essential part of treasury management for a bank. The instructors where hard core Un. of Chicago PhD finance guys. They're telling me the short version of what the software does in a theoretical sense - and I naively ask some dumb (at least they implied they were dumb) questions about extreme outliers that the model wasn't capturing.
Much as Talib explains all their modeling assumed smooth small step movements in interest rates and predictable relationships and liquid markets. I foolishly wanted to know "well, what if those relationships don't hold up?" Wrong question - lets get back to basic operational stuff and leave the theory aside. ha
But what else can they do? No one can "model" major financial earthquakes. The best they can do - or senior execs should do - is be aware of the distant possibility of such things and keep a thick cushion of equity. But more equity means lower return to shareholders means investors dump your stock to buy the next bank's, which means you lose your job. The game is rigged to incent bad behavior.
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TradIsGood
Chalkless climber
the Gunks end of the country
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Jan 18, 2009 - 10:52am PT
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A man's gotta know its limitations.
Applies to physical models as well as economic ones.
The problem is distinguishing when you are approaching the boarders of the limitations of the models.
Aside:
I was taking a little mini-course on currency trading back in spring of 2007 given by professor of Finance with the NY Institute of Finance.
He started explaining the utility of using currency swaps for international trade. Without getting into the details, the idea is that you set up an opposite position in the future to an actual trade in your business to convert customer currency into your currency at today's price so that you do not risk a losing deal due to currency fluctuations (or a windfall profit).
I pointed out that the trade was not riskless, but rather that it was transferring currency risk to credit (counter-party) risk. He explained that the trades were only done with really large banks so that counter-party risk was not material.
Fast forward to today. I know a guy just out of college working for a hedge firm. He is working 12 hours a day reversing currency swaps. He says some of his buddies are doing similar things 14 hours per day.
A man's gotta know the limitations of models, trading strategies, trading partners, and his own firms capitals and risk profile.
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Karl Baba
Trad climber
Yosemite, Ca
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Jan 18, 2009 - 12:51pm PT
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The absolute hell that we have only begun to experience is proof.
The failure of the smartest guys in the country to consistently beat market indexes despite having the most detailed and long term quantitative statistics concerning a vast array of variables is proof.
Economics is more like Religion than science. (perhaps we might grant it a place next to anthropology and sociology)
Some of the biggest companies in the history of the world have either gone down or been saved from going down by massive government bailouts.
Bill Frist claims the lives of 10 million Africans was saved by a 15 billion dollar investment by George Bush and yet we spend 100 Billion to save AIG. Chew on that.
Every turn of the road to where we are has been quantified and analyzed every step of the way by people who could handsomely profit from knowing the future, and yet many practical people have seen this coming including ignorant people like me.
So economics is either a deeply flawed farce utilized by corrupt greedy people to believe what they choose to believe, or it's a farce utilized by corrupt greedy people to transfer wealth through bubbles and crashes. You tell me which.
Because it doesn't take a medical professor to tell a guy that if he goes on an 8 year bender of cocaine, heroin, and speed, which is paid for by borrowing money from loan sharks, that he's going to need serious rehab when his dealer leaves town, and protection from bill collectors as well. He still might get hurt.
Peace
Karl
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Karl Baba
Trad climber
Yosemite, Ca
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Jan 18, 2009 - 01:59pm PT
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Thanks Skip
I was aware that this was a bit of stretch on that point, except that of course, nearly every investment professional tries anyway, and rich, smart people pay them a big premium over index funds to try. (fatty will see the opportunity to chime in with his wares here, why not?) The guys who boss around piles of these not-index-fund-beating losers earn 500 million over 5 years and then become treasury secretary.
and since we have economic data up the ying-yang and all these economic models, it should be plain and clear that the market was going to tank and yet these clowns lose money anyway. (because we can bet on the market going down as well)
Which goes to show my basic point, that economics is as good as witch-doctoring in some very basic ways.
Imagine if climbing topos were like economics.
"Topo says it's a 5.9 crack that's 2 inches for first 20 feet, 1.5 inches for 40 feet, has good rock, a fixed anchor on top with 1/2 bolts, and has been ascended by 400 5.7 climbers, 600 5.8 climbers, and 55 5.6 climbers. Your climbing handicap gives you a 99% probability of sending if the difficulty doesn't somehow change radically. There are 10 pound of loose rock on the top of the crag but it's 10 inches from the edge."
You get on the rock and the crack somehow squeezes to 1/4 inch in an earthquake, crushing your hand, you have to bite off that hand to grab a government fixed line with the other hand, but you find the line wasn't lowered to you, but your government befriended belayer who needs to get back down the approach trail to go on a government paid patagonia expedition. You bleed to death at the base.
PEace
karl
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Karl Baba
Trad climber
Yosemite, Ca
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Jan 18, 2009 - 03:24pm PT
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Thanks Skip
All analogies have their flaws and the climbing one was mostly for humor.
In my opinion, we are all sitting in a giant stinking pile of proof of the limitations of economics.
The proof is in the chocolate pudding.....wait, economics said it was chocolate but really its.........
;-)
Karl
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jstan
climber
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Jan 18, 2009 - 06:08pm PT
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Lafta:
Search on "Greenspan" and you will find a long history of interest in this subject. As chance will have it on Sept. 17,2007( now considered the start of the prime meltdown) I complained about what is presently taken to be a major cause.
Lot of people have been awake for a long time.
On another subject.
The Black Swan is not alone in pointing out that many of the modern factors such as rapid communications and globalization contribute to increased volatility and danger. I believe there is another.
Have you noticed there is now a remarkable similarity in different peoples's responses to external stimuli? You talk conservative politics and immediately you are dealing with angry people. Not logical or analytical. Just angry.
To understand this I think you need to go to the major revolution now taking place in what used to be called psychology. Evolutionary Psychology is changing that field from disconnected observations made by long haired people standing around a campfire while handling bones. It will shortly become a true science where theories may be tested. I would refer you to work by Bass and some of Dawkins' work.
Its premise is that groups of people evolve, in the Darwinian sense, particular responses and behaviors to deal with externalities (problems). The incredible speed of modern communication has decreased by orders of magnitude the time it takes for this to happen. Followers of a particular political thought very quickly pick up which responses are acceptable and make them members of the group. So it is when a particular "spin" has been launched or a response like anger has been stamped as acceptable it becomes widespread almost overnight. You don't have to be an "elite" to pick up on this.
Now when you apply this phenomenology to behaviors associated with economics you can see the danger. When people who perceive a problem are also preconditioned to have the same response - you have a bonafide "panic". It is pre-constructed. It becomes inevitable.
This tendency to "panic" will also open new methodologies for profiteering. Just go left anytime you can predict everyone else will be going right.
You need only be able to predict.
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Karl Baba
Trad climber
Yosemite, Ca
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Jan 18, 2009 - 10:26pm PT
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Finally watched the video.
Seems like "Turbulence" is where we're at and why nobody really knows how to save us.
Feels like a storm on the way.
Peace
Karl
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TradIsGood
Chalkless climber
the Gunks end of the country
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Jan 18, 2009 - 10:41pm PT
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What jstan means is you "only have to be able to predict" about the future.
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Karl Baba
Trad climber
Yosemite, Ca
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Jan 18, 2009 - 11:01pm PT
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Skip
I never think anything is "always."
and the government is never out of the picture as it is a large part of the picture.
anywhere in the world, throughout industrial history.
A more nuanced approach to actual reality will trump idealism.
(although a lot of reality is being marginalized by the label "idealism" (climate change, oil depletion)
Which gives me hope that Obama is our best bet.
Peace
Karl
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TradIsGood
Chalkless climber
the Gunks end of the country
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Jan 19, 2009 - 06:52pm PT
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Ed,
My Life as a Quant: Reflections on Physics and Finance, Emanuel Derman.
I picked this up for Roger. Just read the intro and chapter 1. You might find it interesting. Derman is one of the authors of the Black, Derman, Toy models for interest rate derivatives.
Got his Ph.D. in Theoretical Physics from Columbia in 1973. You might know him or of him since his work was in particle physics.
Interestingly enough, he and I each worked for the same man, at different times. I had not known that.
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TGT
Social climber
So Cal
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Jan 19, 2009 - 11:54pm PT
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Read Mandelbrot's The (Mis)Behavior of Markets a fewe years ago.
The Ten Heresies of Finance chapter is particularly important especialy Heresy #1. Markets are Turbulent.
In the video, he looked worried!
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WoodySt
Trad climber
Riverside
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Topic Author's Reply - Jan 20, 2009 - 11:32am PT
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Well, I'm off to MT. Lemmon. I expect you guys to have the economy fixed by my return.
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Ed Hartouni
Trad climber
Livermore, CA
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OK, I just finished the book. I've got to say it was a slog, Taleb provides a long string of one off stories, largely to convince the reader that unanticipated events can have a very large effect on our lives.
That's not a new idea.
Specifically about economics, however, he derides the mainstream approach of modeling, including the attempt to quantify risk. What is maddening is the lack of description of what is done, and what Taleb's criticism is... basically it is a rant. I found it rather unilluminating, though I think I agree with what I think is the main point of his criticism, which is basically: there is no model.
Ask yourself what the historic rate-of-return is for the stock market. You'll get various answers somewhere in the neighborhood of 7% per year. That's not bad... probably better than anything else you could do.
Your assumption, is of course, that the stock market will behave the same way as it has, historically, over the time period of your investment. But that's not a model.
You could get more sophisticated and project the time series return for a set of investments into the future, and try to guess the deviation. If you do this, you find the "standard deviation" of the historic rate of return to be something like 18%... which should set off all sorts of alarm bells for you assumption above, that's larger than the value, which means, basically, it could be anything.
Taleb would argue that this is right for the wrong reasons... but I would argue that this is not a model of behavior.
In my mind, a model is based on a quantitative explanation of the activity.
Let's take the sun rising tomorrow. I can take a time series and say that tomorrow will be like it has been in the past. I'll get a pretty good prediction, but it isn't a model.
If I take as the model the idea that the earth rotates on its axis, and measure the rotational period of the earth, I can calculate the sun rise. I have to put in the rotational speed of the earth. Of course, I also learn that the earth is tipped out of its orbital plane, so I have to modify my model to account for that. I can predict the sunrise, but the more accurately I do that, the more I find that additional factors have to be taken into account, like the wobble of the axis, that fact that the earth's orbital velocity and rotational velocity are changing, etc...
But doing this provides increasingly accurate predictions of the sunrise.
Now for the stock market... it is said that "fundamentals" are what generate the historic rate of return, but this is not a quantitatively described concept... basically, there is no "model" that tells us what the stock market should do. There are no parameters to input that has the value pop out...
... what is done instead is just extend the time-sequence into the future.
Taleb says that events that cannot be predicted can completely destroy these "models," and the various quantities that are calculated from them, like risk. These events, he calls them "Black Swans" are important, perhaps more important, than the apparent historic stability of the markets.
There are many examples of this, many beyond what are displayed in the book.
The book makes a convincing argument, but it left me with a feeling that really all this investment stuff is essentially like going to Vegas and gambling the cash away... the only difference is that I can calculate the chances of winning in Vegas (pretty slim over the long run, a time relatively short) where as I cannot calculate my chances of "winning" in the stock market.
Given the current state of the economy, and the debacle of judgement that we just went through where greed essentially undid market, I feel I could probably do just well enough with the money I have extracted into a 401(k) as putting into the market.... especially since having broke even is considered to be good, I think I did better than breaking even, but I won't claim it is because of anything I did... rather it was Debbie's risk averseness...
And actually the "mortgage bubble" was hardly unforeseen, rather, people just didn't understand that housing "value" could not keep increasing in an unlimited fashion, at some point, the price of housing just overwhelms the ability of people to pay. Yet few could resist buying into the market... they were making so much money, and projections of the past performance into the future pointed the way to even more return.
Because the reason for the increased return was not understood, and I use the word "understood" in a physics sense (calculable, predictable, limitations understood), it was easy to forget relatively elementary limitations to the "model."
So I ask those of you out there who know: why should anyone use the "historic return rate" of the stock market to project any future return?
Indeed, why should one invest in the market at all?
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Ksolem
Trad climber
Monrovia, California
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You scientists are a trip.
"When the price hits zero, the fluctuation can only go in one direction - it is not symmetric. As the price approaches zero, the randomness is similarly constrained - still not symmetric, and so forth.
The fluctuation can't be random!"
The price of real estate, when upside down, is way below zero. Or any other investment which is worth less now than what you bought it for.
Sorry, no Gaussian or Nebulistian terms from me, but upside down is less than zero.
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Ed Hartouni
Trad climber
Livermore, CA
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so I wrote the above post over a year ago, and right now, the investment markets are all pretty much broken...
if you have savings, you are lucky to be making 1% on interest (see NYTimes today, e.g. http://www.nytimes.com/2010/09/09/business/economy/09rates.html);, the current interest rates make it attractive to take out more loans, and refinance old ones... but what would you do with the money you save?
Obviously, if you were conservative in your planning and assumed that you would only get a 5% return on your savings, you're currently hosed (this in spite of everyone accusing you of being an idiot to assume such a "low" rate of return).
The financial markets, at this point, really look like an open gambling game, that is, one where there is no "house" but obviously winners and losers, with the winners having the necessary connections to push legislation through favoring their position, and the losers being the ones putting up the skin for the winners (that would be the US Gov, and the taxpayers)...
...yes, anyone can play, but just like going to Vegas, the game is staked against you. SOMEONE MUST LOSE in order for someone to gain.
Growth in financial value should track the growth in the markets, and the markets can only grow so fast, limited by people to buy the stuff, and are only so big (limited by people, again). You'd expect that growth rate to be not much more than the population increase, and the rate of growth in standard of living. Right now it's an interesting race to see if the resources run out before the demand is met... the "carrying capacity" of the planet... which is estimated to be around 9 billion people (http://atlas.aaas.org/index.php?part=1&sec=trends); ...
Not everyone can win...
...I ask again, why invest in the markets? What possible model explains the market's behavior...
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HighTraverse
Trad climber
Bay Area
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What possible model explains the market's behavior... I assume the "..." implies you think the solution space is nil.
I have a few personal observations: In My Not So Humble Opinion
1: "the market" is a shibboleth that misleads us into thinking it's a "thing" or a "process" and therefore can be modeled with mathematical constructs.
2: "the market" is merely the aggregate "behavior" of a massive number of human and corporate decisions (including the algorithms that participate in automatic trading).
3: Humans are not entirely predictable.
4: Most Corporations have zero altruistic motives. They are in business to maximize return on investment. Human cost is irrelevant until it affects the bottom line. Corporations do not make decisions based upon the interests of people, not even their consumers.
5: Corporate Officers and Boards of Directors can be incredibly stupid. Their decisions can directly affect tens of thousands of employees and stockholders overnight. HP stock dropped 25% nearly overnight when they fired Hurd and hasn't started rising yet.
6: In America, corporations have two sometimes out of phase forces: the Quarterly returns vs the Annual returns. What saves a Corporation's ass for this quarter may not be in the long term interest of the Company nor its investors. European and Asian companies are not so impatient.
7: True Republicans (as distinct from true conservatives), Libertarians and other such idiots (Alan Greenspan, Milton Friedman) profess to believe the a "free market" (as if such a thing could possibly exist) is a Holy Thing. Mistaking the shibboleth for the reality.
8: In classical terms "the market" assumes a large number of relatively equal players. This assumption is crucial to believing the market can be statistically modeled. It works fine to describe millions of people choosing between dozens of breakfast cereals in thousands of retail stores.
9: The real "market" is not #4 (obviously).
10: The only people who can directly control the decisions that result in market changes are the Federal Reserve, Politicians and Really Big Capitalists (GM, Morgan Stanley, Bank of America).
11: Trade Unions have only a minor direct influence on control decisions. Or in modeling terms, their decisions are very low gain inputs compared to the inputs from #10.
that leaves
12: The control decisions are not made by the people who generate capital by their labor.
13: "the market" when it is stable, by definition follows statistical models (ipso facto).
14: "the market" when it becomes unstable behaves more chaotically than statistically.
15: when chaotic, the results of macro-economic inputs (stimulus packages, tax changes) cannot be predicted with numerical certainty.
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