Mandelbrot Beats Economics in Fathoming Markets • Hacker News Board

Re: Mandelbrot Beats Economics in Fathoming Markets

#21

Post by tbrownaw » Wed, Dec 07, 2011, 7:37 PM UTC

TheCowboy wrote: post #16

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, une…

> Phillips Curve

Wikipedia seems to think that the 1970s in the US show that it doesn't work.

Re: Mandelbrot Beats Economics in Fathoming Markets

#22

Post by arijo » Wed, Dec 07, 2011, 7:40 PM UTC

dreamdu5t wrote: post #15

arijo wrote: post #11

Earlier quoted context omitted.

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…

The ECB buys souvereign debt incurred by countries that have no option but to borrow money from banks that demand very high interest rates - much higher than the interest rates the ECB charges comercial banks.

The purpose of the European Financial Stability Facility is to prevent german and french banks to go bankrupt in case any of the attacked countries default.

"It's a completely factual statement to say some countries are more solvent".

If by some countries you mean the northern countries, this is false: Spain had a superavit before the financial crisis - Germany did not.

Do not confuse opinions with facts.

Re: Mandelbrot Beats Economics in Fathoming Markets

#23

Post by bandushrew » Wed, Dec 07, 2011, 7:44 PM UTC

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 think maybe a key mistake economists make regularly is equating an equilibrium with a lack of change.

In nature stability - on average - is often achieved by matching peaks and troughs, not by a lack of change (nature abhors a lack of change)

(see vacuum fluctuations)

Re: Mandelbrot Beats Economics in Fathoming Markets

#24

Post by binarymax » Wed, Dec 07, 2011, 7:54 PM UTC

"The (Mis)behavior of Markets" is a great read on the subject, by Mr. Mandelbrot himself.

Re: Mandelbrot Beats Economics in Fathoming Markets

#25

Post by washedup » Wed, Dec 07, 2011, 7:59 PM UTC

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.

What you are describing is a Random Walk, 50/50 chance of going up or down, the previous data point holds no significance for the future. Mandelbrot discusses how this viewpoint is wrong in "Misbehavior of Markets" and describes market patterns using two movements: short trends and even shorter bursts. His multifactoral model uses these two ideas to model a market, however prediction is always difficult.

Re: Mandelbrot Beats Economics in Fathoming Markets

#26

Post by balinvadasz » Wed, Dec 07, 2011, 8:01 PM UTC

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.

I disagree completely. What about all inherent biases which make humans do things not in their best interest (they just think it is in their best interest, but many times they don't think, they panic) ?

See: - Loss aversion http://en.wikipedia.org/wiki/Loss_aversion - Sunk cost effects: http://en.wikipedia.org/wiki/Sunk_cost - Status quo bias: http://en.wikipedia.org/wiki/Status_quo_bias

Re: Mandelbrot Beats Economics in Fathoming Markets

#27

Post by washedup » Wed, Dec 07, 2011, 8:01 PM UTC

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…

Yes, surprisingly, a large portion of statistical research in finance and economics assumes normal distributions for model formulation, prediction, and error checking.

Re: Mandelbrot Beats Economics in Fathoming Markets

#28

Post by leot » Wed, Dec 07, 2011, 8:11 PM UTC

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.

Capitalism forces people to try to be rational.

To claim that humans are inherently rational is to deny the widespread existence of psychological pathologies.

Re: Mandelbrot Beats Economics in Fathoming Markets

#29

Post by pixcavator » Wed, Dec 07, 2011, 8:18 PM UTC

dreamdu5t wrote: post #19

tbrownaw wrote: post #13

Earlier quoted context omitted.

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 be…

>"economists asserting the difference between modeling human behavior vs. the behavior of physical objects"

Is it really that different? Try to attach an object to several springs and see if it behaves "rationally".

Re: Mandelbrot Beats Economics in Fathoming Markets

#30

Post by cynicalkane » Wed, Dec 07, 2011, 8:34 PM UTC

This article is a straw man.

I don't think most economists would seriously suggest that the market lives, should live, or ideally would live in a static equilibrium. I know that most economists wouldn't say they can predict the fluctuations of the market. The ones that think they can, of course, get disproportionate amounts of airtime on CNBC or wherever, so it's an understandable misapprehension.