They Did Their Homework (800 Years of It)

An interesting article today about bubbles and ‘data’. An excerpt:

“The advertisement warns of speculative financial bubbles. It mocks a group of gullible Frenchmen seduced into a silly, 18th-century investment scheme, noting that the modern shareholder, armed with superior information, can avoid the pitfalls of the past. “How different the position of the investor today!” the ad enthuses. It ran in The Saturday Evening Post on Sept. 14, 1929. A month later, the stock market crashed.”

The lines that caught my eye:

“‘The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,’ says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work ‘was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened. People almost pride themselves on not paying attention to current events,’ he says. In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor.”

That is why I put my books out there against all comers: the data. Theories are great, and I like trend following theories, but if there was no performance data backing it all up — it’s academic junk science.

6 thoughts on “They Did Their Homework (800 Years of It)

  1. Along with Mike’s own books, “This Time Is Different” is a book worth learning from, especially right about now; then there’s “Where Keynes Went Wrong,” Hunter Lewis, similarly.
    And, as Mike has always pointed out, the dreaded Austrians, “Market Wizards,” the evil Ayn Rand.
    Imagine: Banking & currency crises occurring together, & trashing markets!
    Who ever would have thunk it?
    Thank heaven for back-testing trends…

  2. Indeed. There is no data to support that “spending” now as Krugman advocates…will actually be better in the long run than simply taking the pain now. Just like the addictions so many have developed to the likes of Xanax, etc. … we are a nation that does EVERYTHING to avoid pain … even if the short term pain leads to a brighter future. It’s nuts.

  3. “No pain no gain.” It is abundance that causes stock market crashes. Scarcity of a product or service helps a firm be profitable. The government is trying to prevent scarcity from occuring, plowing resources to badly run companies and is making it more difficult for the great businesses to be profitable. This way we have an abundance of bad products and services making it worse in the long run. The great companies cannot expand their greatness as fast and thus we slow progress.

  4. Humans are suckers for patterns. “Paul”, an octopus in a German zoo, has picked the winner in 6 straight World Cup matches by picking the box with the winning team’s logo on it.

    European bookies report that over 30% of bettors on the World Cup Final are saying, “Give me what the octopus is picking.”

    Substitute Jim Cramer — or any number of market gurus who inevitably blow up — for the octopus and you could be talking about the markets.

    In a world of victim mentality, people are willing to lose their money as long as they can blame someone else…even an octopus.

  5. OK…ultimate irony here…Paul the octopus picked Spain and all the people that followed his advice won.

    Hey, it happens! Even Cramer gets it right now and then.

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