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Ed Hartouni
Trad climber
Livermore, CA
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the time series doesn't tell you anything at all,
the current disaster is the result of extrapolating the time series into the indefinite future, assuming that what was will be... that was the entirety of the model.
Using a model like that you have only yourself to blame when the past isn't an indication of the future.
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hooblie
climber
from where the anecdotes roam
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talk about butterfly effect:
michael lewis, on the ground in greece, portrays the greek economy, and goes on to interview the monks that scored a real estate deal that tipped the electoral scales that led to spilling of the beans on greek debt ... that dumped the euro on it's head.
i'm of the mind that before it's over all debtor nations will default.
http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010
i liked the part about huge tolerance for almost universal system gaming. until ...
outsiders got one over on the system. how are you going to model that mentality?
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bergbryce
Mountain climber
Oakland
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Haven't most economists admitted that beyond a few things, the best they can ever do is make educated guesses? Economics isn't like other sciences with un-debatable standards, but rather a mish-mash of very difficult to account for parameters. It's a crap shoot and some economists are just better than others at "predicting" what is going to happen.
The ones with author-like talent and the most extreme ideas sell the most books though.
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Ed Hartouni
Trad climber
Livermore, CA
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so if you invest, you don't worry about understanding what would effect your investments...
you're saying it really is just rolling the dice, or giving your money to someone who rolls them for you...
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HighTraverse
Trad climber
Bay Area
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the time series doesn't tell you anything at all Unless extrapolated backwards. Then its uselessness becomes apparent.
I'd guess none of the models can deal with the global economics in flux.
Or at least $1 trillion dollars for wars in Iraq and Afghanistan so far. Joseph Stiglitz estimates as much as $3 trillion in Iraq before we're done. $9630 per US resident (2008 population)
A massive transfer of wealth from the US taxpayer. But to where? Accounted for in which economic models?
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bergbryce
Mountain climber
Oakland
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so if you invest, you don't worry about understanding what would effect your investments...
you're saying it really is just rolling the dice, or giving your money to someone who rolls them for you...
I don't consider "financial advisors" or whatever those parasites call themselves (the people who get a cut of my investment earnings for "managing" my accounts) economists. I do put thought/time into where my investments go and choose accordingly and I am no economist. I'm thinking more along the lines of policy makers, the people who analyze the big picture and have the ear of the real movers and shakers.
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rockermike
Trad climber
Berkeley
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I'm pretty familiar with money management theory, and I've worked a good bit with with interest rate risk models (perhaps models isn't the right word? ha) used by big banks. In both cases they are packed with simplifying assumptions that mean they are good for no more than general guidance. The quant guys that run and program these models are well aware of their limitations, but at the end of the day its "the board" that makes the decisions. And they in turn are strongly incented to simply ignore outliers and maximize relatively short-term profits.
The problem in my mind isn't the models in themselves - as long as they are recognized for what they are - but the fact that smart guys see the weakness of the models and invent ways to game the system. Any fool could tell you that AIG and friends were gambling way beyond their capital levels, but the politicians don't have the stomach to take these guys on and meanwhile lots of money was pocketed before the inevitable failure.
By the way, most of the quant guys on wall street are drop-out physicists. Either not smart enough to make it in their field, or smart enough to know where the real rewards are. Perhaps both. lol
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Ed Hartouni
Trad climber
Livermore, CA
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Sep 10, 2010 - 12:05am PT
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we all got recruited hard at Columbia, and very smart guys went to Wall St. instead of staying on in physics...
...those smart guys knew how to find other smart guys. Don't think that was the problem. Just different people with different views of a career...
I think I'm looking for something very simple, or it ought to be very simple:
what is the "thing" that makes people quote a "historical return" of 5% or 7% or whatever...
I think there is not such "thing"
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Steve L
Gym climber
SUR
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Sep 10, 2010 - 12:19am PT
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There is no one "thing", rather there are many "things". When was the last time you saw the methodology behind historical returns? There are plenty of ways to start with a result and work backwards.
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Ed Hartouni
Trad climber
Livermore, CA
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Sep 10, 2010 - 12:23am PT
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I think my premise is stated above, that at best you can break even in a thermodynamic sense... human "values" get mixed up in this but in the end, I think it is difficult to justify very large increases on a return on investment, especially if you account for all the winners and losers...
I have no doubt that people make money on the markets, they are doing it because others are losing money...
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Steve L
Gym climber
SUR
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Sep 10, 2010 - 12:47am PT
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Very, very few people make money over time on asset price appreciation or depreciation. The best managers are only the best for a given time sample. They all revert to the mean. The largest and most consistent sums of money made in the markets are made on management fees and transactions costs.
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jstan
climber
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Sep 10, 2010 - 01:04am PT
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A few weeks ago I got a book for $4 at Borders. The Great Depression Ahead by H Dent. He goes on at great length about using periodicities to do his analysis and predictions but it's his focus on fundamentals and demographics that sounds more germane to me. If you look at the fundamentals for the US position in global trade and technology development/investment you can't explain why one would feel we are going to have growth even vaguely like that of the past. Dent says returns will be low at least till 2020.
Presently we have sustained ourselves at a level higher than is supportable ( I think) because our economy has been bloated through our going outrageously into debt. We are big and our currency is the primary reserve currency - artificially. All of this is changing.
I was just about convinced we have gone through a phase change even before getting this book. The cost of labor in the US has to move closer to the planetary mean, seems to me.
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hooblie
climber
from where the anecdotes roam
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Sep 10, 2010 - 06:10am PT
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disaster, death, bad news? change should carry such a burden? are we so invested in status quo and it's continuation that a black swan should be such a dour sight?
i hope we're at a point of inflection, bad news if we aren't. i question whether investors are so entitled to a "set it and forget it" return that unsustainable growth should be perpetuated on their behalf. adapt already because it's a trader's market these days.
it's doubtful the quants will ever properly account for the neurobiology of trust, or the market dynamics that result from a crowd's fear of change, when change is clearly called for. granted there's more soul to be found in the physics department than in accounting.
the market would have punished any investment banks that muddled along with the old risk models, underperfoming relative to the others until every member of the board fully grasped the implications of the derivative business. make allowance for discovery.
there's nothing cynical in the phrase "known unknowns, and unknown unknowns."
we can't lose our taste for adventure, if that's what you call responding by retooling.
especially when the planet demands it
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jstan
climber
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Sep 10, 2010 - 11:43am PT
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Stock market predictions are like eating a pizza.
You leave the fishies.
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Reilly
Mountain climber
The Other Monrovia- CA
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Sep 10, 2010 - 11:52am PT
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jstan noted that "If you look at the fundamentals for the US position in global trade and technology development/investment you can't explain why one would feel we are going to have growth even vaguely like that of the past."
Hard to see much growth in our future with an economy based on service and
credit. Our latest 12 month trade balance of -592 billion doesn't look so hot
compared to Germany's +211 billion. It would seem there is still a demand
for manufacturing as long as it done well.
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