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Mandelbrot Beats Economics in Fathoming Markets

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Re: Mandelbrot Beats Economics in Fathoming Markets

#11

Post by arijo »

dreamdu5t wrote: post #8

I'm surprised nobody has pointed out that the Euro is a tragedy of the commons. "Pooling sovereign debt absolves the most irresponsible nations from confronting their unsustainable spending by forcing more responsible nations to pick up the tab. All of the incentives are weighted in favor of irresponsibility and none to responsibility. No pie-in-the-sky plan by the EU to dictate budgets to its members will ever work.…

Unlike in the US, in europe the central bank can't lend to euro zone countries. Countries must borrow money from the banks and banks (like Goldman, Morgan Stanley, Deutsche Bank, etc) lend money to countries at highly speculative rates. If you had taken the time to inform yourself before opening your mouth you'd have known that countries like Portugal and Spain had relativley low deficits (much lower then the US) before the financial crisis. Please stop with this 'northern european countries superior monkey' narrative.

Re: Mandelbrot Beats Economics in Fathoming Markets

#12

Post by beagle3 »

smokeyj wrote: post #10

I'm always perplexed by the notion of trying to "model" an economy. I don't understand how aggregate statistics about a market reveal any insight into how to create sustainable value. I feel like it's similar to knowing the past winning numbers on a Roulette table, because it provides no actionable insight to future winning numbers.

On the contrary. Taking your analogy further:

In economy, you find out that whenever "Gentleman Jim" bets, he tends to win 70% of the time, rather than the 49% everyone else gets. Now, depending on policy, you either:

a) forbid jim to play b) readjust jim's token-to-money conversion ratio so he is on par with other players c) invest your money with jim

Note, though, that this being a zero sum game, anything other than (a) will bankrupt the house....

Re: Mandelbrot Beats Economics in Fathoming Markets

#13

Post by tbrownaw »

dreamdu5t wrote: post #9
_delirium wrote: post #2

This is a good overview, though as one minor quibble, the critique of "rational agents" is separate from the critique of equilibrium models: even if all economic actors are rational agents, that doesn't imply that everything converges instantly to nice equilibria with an absence of feedback loops, attractors, and the other typical nonlinear-dynamical-system pathologies. In fact most agent simulations in AI that use r…

"Rational agents" in the context of economics does not mean people make the best choices for maximizing capital preservation. It means that human behavior is inherently rational because only an individual knows if his choices were in his best interest.

So it's basically meaningless?

Re: Mandelbrot Beats Economics in Fathoming Markets

#14

Post by da_dude4242 »

beagle3 wrote: post #12
smokeyj wrote: post #10

I'm always perplexed by the notion of trying to "model" an economy. I don't understand how aggregate statistics about a market reveal any insight into how to create sustainable value. I feel like it's similar to knowing the past winning numbers on a Roulette table, because it provides no actionable insight to future winning numbers.

On the contrary. Taking your analogy further: In economy, you find out that whenever "Gentleman Jim" bets, he tends to win 70% of the time, rather than the 49% everyone else gets. Now, depending on policy, you either: a) forbid jim to play b) readjust jim's token-to-money conversion ratio so he is on par with other players c) invest your money with jim Note, though, that this being a zero sum game, anything other tha…

In what sense is this a zero sum game?

Sure if economics could be reduced to gambling it is zero-sum but betting in economics is betting on those who will create value(ideally).

Re: Mandelbrot Beats Economics in Fathoming Markets

#15

Post by dreamdu5t »

arijo wrote: post #11
dreamdu5t wrote: post #8

I'm surprised nobody has pointed out that the Euro is a tragedy of the commons. "Pooling sovereign debt absolves the most irresponsible nations from confronting their unsustainable spending by forcing more responsible nations to pick up the tab. All of the incentives are weighted in favor of irresponsibility and none to responsibility. No pie-in-the-sky plan by the EU to dictate budgets to its members will ever work.…

Unlike in the US, in europe the central bank can't lend to euro zone countries. Countries must borrow money from the banks and banks (like Goldman, Morgan Stanley, Deutsche Bank, etc) lend money to countries at highly speculative rates. If you had taken the time to inform yourself before opening your mouth you'd have known that countries like Portugal and Spain had relativley low deficits (much lower then the US) bef…

The ECB purchases member countries' debt. They move bad or weak assets off the balance sheets of the weak member banks into the balance sheets of the ECB. The stated purpose of the European Financial Stability Facility is to pool sovereign debt. The owners and shareholders of the european central bank are the central banks of member countries.

I didn't say anything about northern European countries being superior. It's a completely factual statement to say some countries are more solvent than others. It's not a value judgement.

Re: Mandelbrot Beats Economics in Fathoming Markets

#16

Post by TheCowboy »

smokeyj wrote: post #10

I'm always perplexed by the notion of trying to "model" an economy. I don't understand how aggregate statistics about a market reveal any insight into how to create sustainable value. I feel like it's similar to knowing the past winning numbers on a Roulette table, because it provides no actionable insight to future winning numbers.

There are many models considered common knowledge in economics that possess strong explanatory and predictive power.

Though in recent times people tend to pick and choose which models they base their thinking on, depending upon their chosen political agenda.

Brief example: There has been a lot of political hand waving about possible inflation or even hyperinflation. If you look at a version of the Phillips Curve, unemployment and inflation have an inverse relationship. High unemployment = low inflation or worse. And inflation has remained low, while deflation has actually been more of a threat, and is actually a problem in many countries.

Re: Mandelbrot Beats Economics in Fathoming Markets

#17

Post by saurabh »

adaml_623 wrote: post #6
JonnieCache wrote: post #3

It staggers me that so much prevailing thought still leans towards the idea of complex, highly connected systems as inherently stable, with their natural state as equilibrium. It dates back to the victorians, with their "All things Bright and Beautiful" view of god's creation, which was shattered by darwin. How long it takes us to learn the important lessons. This view was prevalent in the world of ecology for decade…

I agree with your first 2 sentences but I think that Adam Curtis's 'films' should not be watched by anyone. Especially someone trying to think about something like stability and connected systems. His train of thought narration and brilliant music is just opium for people who aren't concentrating.

I agree. I have watched almost all of his documentaries. In retrospect, everything looks like a con. He narrates history as if it was a big plan by the people in power but he forgets how utterly chaotic the world is. And yes, it is opium and I enjoyed watching his work.

Re: Mandelbrot Beats Economics in Fathoming Markets

#18

Post by JonnieCache »

saurabh wrote: post #17
adaml_623 wrote: post #6

Earlier quoted context omitted.

I agree with your first 2 sentences but I think that Adam Curtis's 'films' should not be watched by anyone. Especially someone trying to think about something like stability and connected systems. His train of thought narration and brilliant music is just opium for people who aren't concentrating.

I agree. I have watched almost all of his documentaries. In retrospect, everything looks like a con. He narrates history as if it was a big plan by the people in power but he forgets how utterly chaotic the world is. And yes, it is opium and I enjoyed watching his work.

You may enjoy this exquisitely observed parody, "The Loving Trap"

http://www.youtube.com/watch?v=x1bX3F7uTrg

Re: Mandelbrot Beats Economics in Fathoming Markets

#19

Post by dreamdu5t »

tbrownaw wrote: post #13
dreamdu5t wrote: post #9

Earlier quoted context omitted.

"Rational agents" in the context of economics does not mean people make the best choices for maximizing capital preservation. It means that human behavior is inherently rational because only an individual knows if his choices were in his best interest.

So it's basically meaningless?

The way it's typically used today is meaningless.

It came from economists asserting the difference between modeling human behavior vs. the behavior of physical objects. In that sense it is not meaningless. It's an important distinction that in order to model human behavior, we have to accept that people's goals are myriad and constantly shifting, and that we can only come to know their goals or preferences by them being revealed in action.

Re: Mandelbrot Beats Economics in Fathoming Markets

#20

Post by Indy_Dh »

Symmetry wrote: post #4

Wait, did economists think at one point that the distribution of movements in a stock market followed a Gaussian pattern? I mean, amateur statisticians approximate things to Gaussian distributions all the time to make the math easier, but that's hardly a problem unique to economics. As to the Omori distribution, have they actually succeeded in making forward looking predictions with it, or were they just fitting a mo…

When they say "fat end of the tail," a Gaussian distribution is not necessarily implied. They are simply saying that when you go to the extreme ends of any distribution, almost any statistical model will begin to fall apart. If you look normalized data and look at a Q-Q plot, you will no doubt see problems at the extremes of the distribution, making those predictions more difficult.

As for the Omori distribution, I do not know anything about it, but I have studies similar distributions for predicting future Olympic running records,tallest human alive, etc, and these types of distributions rarely produce practically feasible results. If this model works well, I will be thoroughly impressed.

The only field that I know which deals with extreme events is Ruin Theory, but it is currently a very limited field. It may be possible for someone to adapt the field to study Macroeconomics, but even that may not be very informative.

At humanities current understanding of economics, I would argue that Black Swan Theory is the only practical way to understand huge economic shifts. Perhaps we will understand economic markets well enough to develop more complicated models, but that seems far in the future.

Q-Q plot: http://en.wikipedia.org/wiki/Q-Q_plot Ruin Theory: http://www.worldscibooks.com/etextbook/5943/5943_chap01.pdf

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