Comments on: Turning on a Paradigm

By: Merril The Welder

Merril The Welder — Fri, 16 Jul 2010 21:10:09 +0000

To say that there is absolutely no place in economics for ideology in economics is a very bold statement. On a global stage, it’s a different playing field because cultural differences affect economic decisions and what appears logical to one culture appears absurd to another. That’s impossible to root out, except on paper and in theory.

By: Symmetry Capital Management, LLC » A Strong Dollar Call

Symmetry Capital Management, LLC » A Strong Dollar Call — Wed, 20 Jan 2010 17:27:03 +0000

[...] however well it might have worked in the 1980s and 1990s. [1/20/2010 UPDATE - well written piece here on how public thinking about policy is heavily informed by experiences since the 1980s, which [...]

By: Keith Eubanks

Keith Eubanks — Mon, 10 Aug 2009 16:25:48 +0000

Mark,

What you discribe as the three phases of recognition (denial, migration, capitulation) are a discription of what I call the perception delay; that is perception of reality is delayed from that reality — always and in all phases of the pendulum swing. We really do drive by looking in the rearview mirror.

My background is in the field of system dynamics — a modelingly technique developed at MIT that applies concepts from feedback control engineering to studying social systems such as markets or the general economy. My observation is that what we generally term as the “economy” (the collection of national or world economic activity) is far, far too complex for any individual to understand or forecast simply by thinking about it. Hence, we have all of these idealogical conflicts.

Mental models are not sufficient to sort out these issues and I doubt there are currently any mathematical models sufficient to either. Hence, we are left arguing about it.

However, I do think that the debate could be enlightened by putting our theories (mental models) to the test in very explicit mathematical models — at least to explore the plausible and perhaps discount some of the implausible.

By: Turning on a Paradigm « The Ex Ante Factor

Turning on a Paradigm « The Ex Ante Factor — Wed, 05 Aug 2009 23:14:21 +0000

[...] Turning on a Paradigm Turning on a Paradigm By Mark Dow [...]

By: Twofish

Twofish — Tue, 04 Aug 2009 21:45:09 +0000

I don’t think that it is so make a pendulum swinging. The reason that Keynesian economics fell out of favor in the 1970′s is that Keynesian economics really has no answer to stagflation. If you have high inflation/low growth then Keynes just doesn’t tell you what you should do whereas Milton Friedman did.

The reason that Keynesian economics is back in fashion is that the Chicago school and monetarism offers basically no answers for current problems.

By: Twofish

Twofish — Tue, 04 Aug 2009 21:40:38 +0000

RebelEconomist: I doubt your hypothesis about market cycles. If some kind of sentiment cycle existed, then it should be possible to forecast market direction using an autoregressive model.

It is, the trouble is that in boom times, the model gives the wrong numbers. You are making 2% whereas everyone else is making 20% and laughing at you. What most people do at the point is to give into temptation with the hope that they can get out before the market crash. That doesn’t work.

Also the market dynamics works against you. If you are a money manager making 2% while everyone else is making 20%, then no one is going to give you any money to manage.

By: Twofish

Twofish — Tue, 04 Aug 2009 21:34:01 +0000

RebelEconomist: I reckon that if a pattern is sufficiently regular for you to observe it, Mark, it can be modelled and forecasted.

No.

Once large numbers of people start making money off the pattern, the pattern will change.

You can divide economic patterns into two groups, positive feedback ones, and negative feedback ones. Negative feedback patterns disappear if people act on them. (The supposed advantage of investing in small caps basically disappeared once people pointed it out.)

There are also positive feedback patterns that expand when people act on them. People see stock prices rise, they buy more stock, prices price more. Eventually it blows up and the feedback works in reverse.

By: RebelEconomist

RebelEconomist — Tue, 04 Aug 2009 19:29:26 +0000

That’s just my experience, Mark. I can believe that there are, for example, some guys with highly specialised knowledge who can make genuine alpha for a while at least until others copy them – eg bankruptcy arbitrageurs might have done well recently. But they are a minority and economic policy would not be modified to rescue them and their clients.

By: Mark Dow

Mark Dow — Tue, 04 Aug 2009 18:15:55 +0000

RebelEconomist – I see your point. I know guys do do that. And I know that this always happens in the run up to a crisis. But where I differ is with the statement:

“everyone who I encountered who claimed, even thought themselves, that they were making money out of market timing were actually making money out of selling liquidity or accepting tail risk”

I think there are indeed a lot of guys who fall into this camp–especially in the fixed income/credit space, but it is by no means universal.

By: RebelEconomist

RebelEconomist — Tue, 04 Aug 2009 17:36:55 +0000

Mark, you mistook my point. I meant that, assuming that the fund manager is able to mix strategies to some extent, they may emphasise, say, their skill at market timing, whereas over a series of positions, the juice is actually coming from, say, a credit switch. For example, a manager adjusts the duration of a fixed income portfolio by choosing a shorter or longer bond, but they always switch into a less liquid or less creditworthy bond. In my day, this was known as “corporate tilt”. The P/L on the duration bet is comparatively large, but effectively random if they have no market timing skill, while the return to the liquidity or credit component is generally positive until…..poom! Without rigorous return attribution you may not spot this pattern before the crisis.