Is Economics rubbish? (serious discussion)

Quote from Remiraz:

I understand your point.

But I'm not talking about 100% or 90% accuracy. I'm talking about better or equal to random.

Say if an Economist "bets" the same amount every trade, leaving himself expose to the exact same dollar value of profit/loss:

1) If Econs is rubbish and he is no better than random (throwing darts at a board), he will lose money.

2) If Econs has a little merit and he is 51% accurate or more, he will make loads of money in the long run.

If 2) is the case and Economists have some predictive powers on macro trends, it would refute the Efficient Market Hypothesis won't it?

Eagrly awaiting your further input.
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I don't necessarily think that economists who have a speciality in labor economics, can translate that increased knowledge to a financial market. There are alot of papers out there involving questions that have nothing to do with financial markets that come from economists. I recently read one paper that attempts to determine a quiting rate for employees at firms with segmented levels of earnings and who have existed for varying periods of time. Interesting read, and obviously useful when working at a company, (Statistically, how many of my current employees are going to be here next year... Should I take a job there given the fact that I'll probably see x% employee turnover etc...) but I don't think you really gain many trading ideas that weren't already there.

I'm also not sure how many macro economists know about the availability of the ability to bet directly on the outcome of certain macroeconomic numbers (Tradesports Financial section etc...). Also, since they are the ones creating the expectations, I'm not sure how ethical it would be for them to make the bets. It sounds like a recipe to have a disaster like you did in the Gas Daily indexes a couple years ago. If I'm an economist who has a perfect model that is exactly right every time, then I would be incentivized to predict an inaccurate expected number for the public. I could create a significant difference between market expectations and my position and profit handsomely when the market corrects itself... maybe Rufus or someone else who has significant experience from the trading floor of a large bank can tell us whether or not their in house economists were allowed to make bets on their own behalfs.

If the macroeconomist doesn't bet directly on the number though, then he is going to be leaving himself exposed to a lot of messy financial details that he probably wants no exposure to by doing things like playing the bond reaction on a specific number or gauging when the best time is to take an out on the currency he is holding.

As for Efficient markets Hypothesis (EMH), the ability to predict a future number doesn't contradict it at all. Even semi strong form EMH just states that all price information currently incorporates all public information. Since the economist is making a prediction about information that is about to be made public, if he was trading a number, there is no way the market could have properly discounted the number as a part of public information, because it wasn't public until recently. It would however, definitely contradict the strong form EMH, which states that all information is currently encompassed in a price. So despite the fact that IMO, for the large majority of markets, the semi strong EMH is close to rubbish, this specific example doesn't contradict it...

but Keynes and Ricardo both got filthy rich playing the market.
 
Well I'm about a year away from a bachelors degree in economics so this topic hits a little close to home. But saying that economists should be good traders is like saying mechanics should be good car salesmen. Okay maybe thats a bad example. But just knowing how the system works doesnt make you a good player in it.

A great deal of what you learn in undergrad is the theory and why the theory and reality dont jive well. The basic concept is that people do things for a reason and if that reason is rational we can make a model for it. I apply what I learn very basically when I trade. I consider the opportunity cost of the trade, or I consider if that trade rational, or if it had a high probability of success, and then more macro thoughts of well the trade went good/bad so how much of that was luck and how much was skill and how change my judgement of the future. Many of my classes are classical economics courses dealing with supply and demand, competitive forces, market theory and various types and results of elasticity. There is also a very strong math and statistical analysis component. I'm taking some game theory and decisional classes which are interesting because they show why some economic models should but dont work.

I think economics more than any other major teaches how to rationalize the world and understand the forces of the imperfect games we play everyday. I wonder if any of that made sense.

Jamaal
 
TRADERS (vs. investors) are not generally trading stocks, futures, or whatever

they are trading OTHER traders.

Investing is different. In investing, you can take a Buffet/Graham approach, a lynchian approach etc. and make $$$.

In TRADING (short term basis) fundamentals are mostly irrelevant. It's about supply/demand - it's about what other traders are doing.

Saying an economist would necessarily succeed in trading would be like saying a biologist would necessarily be able to perform surgery, or a sports scientist would be able to run a 10 seconds in the 100 m dash

it's not a logical assumption

Economists have been (generally) wrong about the stock market because they don't understand psychology. Certainly, efficient market theory was one of the dumbest theories EVER to come out of academia (and that is saying a lot) and more disturbing is that they fought to defend it tooth and nail despite a million points of data refuting it. scientists always do this. they are as human as the rest of us.

Economists can tell us a lot. But they can't tell us how to trade. Frankly, trading has very little to do with THE ECONOMY (tm).
 
Quote from whitster:

Saying an economist would necessarily succeed in trading would be like saying a biologist would necessarily be able to perform surgery, or a sports scientist would be able to run a 10 seconds in the 100 m dash

it's not a logical assumption
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Those are so much better than my mechanic car salesman analogy. For anyone that read my post disregard what I said and substitute whitster instead.

Jamaal
 
thanks man!

and btw, to add a point here, i think economists (and PhD's and MD's etc.) are probably less likely to succeed in trading because of ego/hubris than probably the average joe.

most traders don't fail because of lack of analytical ability (imo), they fail because of poor risk managment/money managment/emotional management, etc. which are all interrelated.

Economists who think they KNOW better than the market are fodder for other traders who are willing to cut losses when they are wrong

Fwiw, floor traders especially tend to be former athletes, and quite frequently blue collar and/or middle class, and probably less likely to have advanced degrees, let alone in Economics.

i think that athletes have a certain sort of intelligence (the ability to rapidly discern a field of inputs and make a decisive play and constantly adjust to changing data) that naturally would apply to trading
 
To the original poster...

If you had a genuine argument, I'd let this slide but you've not offered any food for thought at all. I've got a degree in Maths so I am no advocate of Economists because there never is a definitive answer to aim for.

I think, because there is so much ambiguity and contradiction in economics, you've come to the assumption that there's no value in it. I love Maths because it offers you an answer but you can't ignore Economics when it comes to trading or moreso investing. Just because you can't measure it's worth and aptness, that doesn't make it useless.
 
The market is a discounting mechanism. Taken in isolation, generating profits from making the "correct" economic assessment of the future is a function of the extent to which your opinion has already been incorporated into the present market price.
 
Ok guys, I study this topic in grad schol, so heres my humble opinion.

Economists study in areas that are difficult to run controlled experiments. Here's some distinctions. A controlled experiment can be a drug company doing drug trials. The variables they try to explain can be controlled by using identical rats. ie. size, weight, age, ect.. Give the exper. drugs to half of the rats and nothing to the other half then observe. Physiological difference in the 2 categories of rats can be explained by the drug. This is the basic logic.

Unfortunately, the field of econ studies difficult to control environments. You should know that the variables affecting prices are next to impossible to control and impossible to completely list. Thats why only a few of us can actually make consistent money.
I also safely assume financial markets are too complex to practically control and I am assuming a static environment. Introduce dynamic systems and you have the field of chaos theory which I would love to study more, but I digress.

A truly controlled experiment completely explains a hypothesis while other experiments cannot. Economists attempt to test theories in a world with much noise. In the end, statistics is used. Inferences are based on confidence levels of 99 to 95 percent. This explains why economists will not tell you anything conclusive. Neither can we make up our mind. This is sound logic to us while it is ludicrious to the uniformed. To us, it is blasphemous to claim something even if you are 99% confident. Moreverer we test the alternative hypothesis which basically means that instead of testing something is true we test the alternative "isnt" true.

Economists arent traders but this is not their bread and butter. A distinction must be made in explanative theory and predictive theory. Both come in handy. Most areas of academics are explanatory. Predictive is not necessary explanatory and vice versa.

Hope this helps.
 
Quote from Remiraz:

For mathematical/quantitative Economics to be a viable field worth developing, it has to possess some analytical merits.

On the other hand, if Economics is a viable mean of analyzing the economy, it would be a viable mean of making money in the markets. (Analyze economic changes/policies, bet on the outcome. Interest rates, debt, currency valuation etc)
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Since market prices reflect the perception of value based on future projections, the economist's future projections in relationship to other's who have already placed their bets (priced it into the mkt) relative to his at the time he makes his bet is more a determining factor as to if he can profit by his projection or not, rather than the correctness of it. Thus, in my opinion the failure by an economist to profit by an economic projection doesn't have much to do with whether it is a viable means of analyzing the economy. It has more to do with the relationship of his forecast to other's and how much of it is already priced into the market, or perhaps overpriced into the market.

If you broke this down to a more micro and easier to follow level you would say the same about a stock analyst predicting the future price of an individual stock based on his earnings estimate. If a lone analyst is correct in predicting the earnings of a company will be much greater than the forecasts of all other analysts, then his prediction will probably in that case yield a good gain (assuming he bet on it) since it will not be priced into the stock. If he is also correct in predicting an earnings shortfall of another company but that estimate is the same as most other's, than it is unlikely that that he can profit by this forecast although it is just as correct as his first.

Add to this the dynamics of constantly changing conditions and adjusted forecasts and perceptions, then timing becomes much more important. So I guess a good question to ask in order to provoke more thinking on this is - why do economists take the same data points and arrive at differing conclusions, and why do some of these lag.

I do not have an economic background so please forgive my thumbnail analysis.
 
Quote from hcour:

In 2003 I read Peter Navarro's "If it's Raining in Brazil, Buy Starbucks" which is about "Macrowave Investing", i.e., trading using economic indicators as part of your strategy. The book seemed to make a sense (keeping in mind I knew/know next to nothing about economics) so I subscribed to his free newsletter. Using a combination of TA and his economic forecasting, he kept calling tops in the S&P ("Put a fork in this rally because it's done!") while in the meantime it kept going up and up and up.



H
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Interesting...i'm reading that book right now. He uses alot of action words, like 'sour', 'zing', 'zoom', 'plummet', 'plunge'. Not sure what direction he is talking about. Probably would have been better if he used simple words like 'the market went up' or 'the market went down'. But then again, he probably didn't write the book. I'm sure he wrote the rough draft and then a 'ghost writer' probably rewrote the whole book. That's what usually happens. But so far, the book is good.
 
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