Is Economics rubbish? (serious discussion)

R

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)

Are economists rich traders? Probably not. Which imply that economic analysis might be no better than random. This means it is not a viable academic field of study.

A paradox of sorts? If Economics is rubbish, why does the field exist in academia? If Economics isn't rubbish, it would defeat the Efficient Market Hypothesis and make Economics are must have education for traders.

Since rich traders aren't economists, economics is thus rubbish?
 
ahhh Remiraz...

First I am a Trader, not an economist, so please excuse the interruption...

I still think that Dr. Alan Greenspan is a genius. Countries posture, prepare and budget on these forecasts...
 
Quote from Remiraz:


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)
More...

Hmm... this post seemed full of partially completed thoughts, but this is the one I latched on to.

Firstly, I think I always viewed the fields of quantitative finance and economics as tools to interpret the world. Saying that we shouldn't study them because they are imprecise tools, (as demonstrated by the fact that most economists aren't sucessful traders) is probably approximately equivalent to saying that we shouldn't study meterology because meterologists have traditionally been poor at trading weather derivatives. These are both areas of study that have huge numbers of variables, and models that seek to make approximations to simplify them. So, even after accepting the fact that models are always imprecise, and very often misleading, I would say that very often economists do a decent job of making predictions within the parameters of their models. However, I think the process of being profitable adds an extra element of complexity onto the issue of whether a prediction is correct or not. An economist could make a very good call on a jobs number, but not know the optimal or most efficient way to either price what he was trading, or hedge the level of risk associated with varying levels of correctness built into his model. He could be making the "correct" call on the jobs number, but because of some type of unintended market exposure, or the number being at a far end of the range of acceptability within his model, he might end up losing money.

With that being said, I think there is a fair amount of rubbish built into the study of economics, but I also think it's getting (slowly)better.
 
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)

Are economists rich traders? Probably not. Which imply that economic analysis might be no better than random. This means it is not a viable academic field of study.

A paradox of sorts? If Economics is rubbish, why does the field exist in academia? If Economics isn't rubbish, it would defeat the Efficient Market Hypothesis and make Economics are must have education for traders.

Since rich traders aren't economists, economics is thus rubbish?
More...

I'm actually kind of curious at this point to find out if you have ever taken any economics classes? There are many aspects of economics that are quite solid, the concept of supply vs. demand as a determinant of price being the first thing that comes to mind. In fact, this concept directly relates to the operation of our financial markets.

As for your comment that "rich traders aren't economists", how do you know this to be true? I would think that the larger your trading size, the more macro your trading focus becomes.
 
davidlynch2000 makes good points. I would add that economists may be better at predicting a longer term trend. An economist would probably be a poor intraday trader. But he may be very good at predicting a recession. So, although he may not pick the exact right price (and he may be off by several weeks or months) eventually he can see where the economy is headed. Of course that depends on the economist. But, I think most traders' time frames are too short to appreciate what economics has to offer.
 
Quote from Chagi:
I'm actually kind of curious at this point to find out if you have ever taken any economics classes?
More...

Yes.

Quote from Chagi:

As for your comment that "rich traders aren't economists", how do you know this to be true? I would think that the larger your trading size, the more macro your trading focus becomes.
More...

Well, economists and rich traders aren't a very common association. Futhermore, I read of the trading failure of people like John Nash, one of the greatest economists of our time.
 
Quote from davidlynch2000:

Hmm... this post seemed full of partially completed thoughts, but this is the one I latched on to.

Firstly, I think I always viewed the fields of quantitative finance and economics as tools to interpret the world. Saying that we shouldn't study them because they are imprecise tools, (as demonstrated by the fact that most economists aren't sucessful traders) is probably approximately equivalent to saying that we shouldn't study meterology because meterologists have traditionally been poor at trading weather derivatives. These are both areas of study that have huge numbers of variables, and models that seek to make approximations to simplify them. So, even after accepting the fact that models are always imprecise, and very often misleading, I would say that very often economists do a decent job of making predictions within the parameters of their models. However, I think the process of being profitable adds an extra element of complexity onto the issue of whether a prediction is correct or not. An economist could make a very good call on a jobs number, but not know the optimal or most efficient way to either price what he was trading, or hedge the level of risk associated with varying levels of correctness built into his model. He could be making the "correct" call on the jobs number, but because of some type of unintended market exposure, or the number being at a far end of the range of acceptability within his model, he might end up losing money.

With that being said, I think there is a fair amount of rubbish built into the study of economics, but I also think it's getting (slowly)better.
More...

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.
 
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.

Economic Analysts seem just like Market Technical Analysts and Market Fundamental Analysts - One of them can arrive at a completely different conclusion than another w/both looking at the same data.

H
 
I think a lot of it has to do with economic study being more scientific (or at least trying to be), while investing is as much about psychology as it is science.

Most economics use statistics (unemployment, inflation, etc) or "rules" (supply/demand) to explain things and make predictions. Many people who consider themselves investors, are really just speculators planning on someone else paying them more for their asset in the future. Look at the history of asset bubbles. People know that prices are getting out of control, but somehow they feel compelled to be a part of it.

In either field, whenever you deal with the randomness of human behavior it is impossible to accurately predict what will happen. I think the analogy to a meteorologist is perfect.
 
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)

Are economists rich traders? Probably not. Which imply that economic analysis might be no better than random. This means it is not a viable academic field of study.

A paradox of sorts? If Economics is rubbish, why does the field exist in academia? If Economics isn't rubbish, it would defeat the Efficient Market Hypothesis and make Economics are must have education for traders.

Since rich traders aren't economists, economics is thus rubbish?
More...

There are several more cogent alternatives to your reasoning processes. Therefore, considering these may be more valuable for you to do with respect to determining how you can profit from a thorough understanding of economics.

It was manditory, for me, to take economics classes as part of my engineering training. When next I met up with one of my instructors it was at the annual NSF handout where I was a presenter as the annual selection of "innovation of the year" in the sciences. We chatted and his recollections had most to do with Q's I raised in classes.

Your post is more or less an inquiry, actually.

Economics applies more to the instruments of trading than trading itself. Realizing that economics can be used to evaluate the objects of your trades, makes it possible for you to get the advice of economists with respect to the instruments.

This advice is directly connecting economics to instruments and their economic performance. This would directly relate to the EPS performance of an instrument. An instrument's RS is, perhaps, more attuned to making money trading or investing. RS is more a market function of the instrument.

The economics of instruments is one thing. Making money trading instruments is more a function of financial markets.

Marginal analysis of an instrument's supply and demand in financial markets may be an important aspect of making money trading but it is more likely that the traders will use other means than economics to determine how best to take advantage of supply and demand in trading.

The meteorology example may be extended to make the above point. If a person is wanting to make money growing things, he may want to specifically focus on getting the job done effectively and efficiently. He would go to a greenhouse designer instead of a meteorologist. In Safford, near to where I live, the Swedish have arrived with their tomato factories. Why? Because the external climate is best outside of the greenhouse for building greenhouses that grow tomatos. Meteorologists did not determine this. Greenhouse designers and builders did. A climate within a climate so to speak.

You can learn a lot from economists about how instruments make money. That learning allows you to classify instruments et al. When it comes to making money in markets, seek the help of someone who makes a lot of money in markets using their methods. Find out what the name of this field of expertise is and go look there.

What is the name of the field that includes the money makers who make money as you do? What if it is not formalized as yet?

You can see that ET is not really a place where people, in general, get past where you are in thinking about things. Trading is a field where performance is largerly a case of comparing practitioners and not comparing the potential of trading (as stated by the markets for extracting money) with the performance of traders. When that shift comes along, trading per se is going to be in a much better place.

ET has many parts. Where are the parts that have the MEAT?
 
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