My Favorite Chart on Earth • Hacker News Board

Re: My Favorite Chart on Earth

#41

Post by jhamburger » Wed, Jan 19, 2011, 5:51 AM UTC

brc wrote: post #37

All very interesting but the author fails to discuss the survivor bias inherent in the Dow Jones Index (or any other index, for that matter). This is the results of the companies that survived. A lot of companies have dissappeared over this time, both through poor performance or going bankrupt. In fact, GE is the only company that has remained on the index since it's inception. So unless you're buying index funds tha…

Keep in mind that the majority of the success and growth in the companies in the Dow happened BEFORE they were added to the index, so it isn't factored in. If holding the top 30 US companies was inherently a market-beating strategy, investing would be easy.

Re: My Favorite Chart on Earth

#42

Post by ramchip » Wed, Jan 19, 2011, 5:54 AM UTC

In war time, the economy appears to stall, since the growth is concentrated in war-related products which do not influence indicators like the consumer price index. After the war ends, the industry goes back to normal and the CPI `catches up', making it look like the war boosted economic growth.

That's how we explained it when I studied economics, at least IIRC.

Edit: just noticed the website name. "The Christian Science Monitor". I feel slightly cheated.

Re: My Favorite Chart on Earth

#43

Post by throw_away » Wed, Jan 19, 2011, 6:46 AM UTC

TomOfTTB wrote: post #30

randallsquared wrote: post #29

Earlier quoted context omitted.

Also saying "The war on terror" is kind of misleading since troop levels have varied greatly. Only if you believe the cause is troop levels. There are lots of things about a war that could be responsible for a correlation that are not directly correlated with number of troops deployed.

The author is contending that armed conflicts have an impact on the economy. I'm offering other conflicts with similar troop levels to disprove that theory. I'd be open to any other factors you think distinguishes the Afghan conflict from these other conflicts but just saying there could be other unnamed factors doesn't further the debate.

Rereading the article, I don't think the author is claiming that at all. The wording of the original yc comment framed the question in terms of whether wars are good or bad or what constituted a war, etc., and that's how we followed, but all the author claims is that wars=inflation and that good dow years follow inflationary spikes.

I would imagine that the only reason why someone would posit this correlation would be to say something on how to view our current situation, and I think he's saying that we've had a bad 10 years (logarithmicly speaking), but once we're out of this war (by him, inflationary) period, things will be great.

I'm not sure if I buy this argument or its implications, but the omission of korea, panama, gulf war 1 and somalia and the inclusion of the GWoT don't "ruin" it for me, at very least.

Re: My Favorite Chart on Earth

#44

Post by ThomPete » Wed, Jan 19, 2011, 9:54 AM UTC

nostrademons wrote: post #17

qq66 wrote: post #3

Of course Korea and First Gulf War are not here, since they would ruin the author's argument. Cue the chorus of people arguing why Korea and First Gulf are "different."

They aren't different. There was a post-Korea inflationary period and subsequent recession in 1953-1954 as the Fed restricted monetary policy to quell the inflation: http://en.wikipedia.org/wiki/Recession_of_1953 There was also a recession brought on by the oil price spikes of the First Gulf War: http://en.wikipedia.org/wiki/Early_1990s_recession The trend still holds up, it just wasn't worth mentioning in those case…

Too many amateur investors in the market.

Re: My Favorite Chart on Earth

#45

Post by gjm11 » Wed, Jan 19, 2011, 10:22 AM UTC

ramchip wrote: post #42

In war time, the economy appears to stall, since the growth is concentrated in war-related products which do not influence indicators like the consumer price index. After the war ends, the industry goes back to normal and the CPI `catches up', making it look like the war boosted economic growth. That's how we explained it when I studied economics, at least IIRC. Edit: just noticed the website name. "The Christian Sci…

I don't think the performance of the stock market varies depending on whether the person reading the numbers is a Christian Scientist. If it did, that would be even more remarkable and weird than if Christian Science were correct in, e.g., its claims about disease.

(For the avoidance of doubt: No, I am not a Christian Scientist.)

Re: My Favorite Chart on Earth

#46

Post by simon_ » Wed, Jan 19, 2011, 1:34 PM UTC

brc wrote: post #37

All very interesting but the author fails to discuss the survivor bias inherent in the Dow Jones Index (or any other index, for that matter). This is the results of the companies that survived. A lot of companies have dissappeared over this time, both through poor performance or going bankrupt. In fact, GE is the only company that has remained on the index since it's inception. So unless you're buying index funds tha…

There is not actually survivorship bias in the DJIA, because changes to its composition are not retroactive. If an index member goes bankrupt, it will absolutely bring the index level down substantially.

Re: My Favorite Chart on Earth

#47

Post by thalur » Wed, Jan 19, 2011, 1:45 PM UTC

The graph is titled (roughly) "500% rises follow inflation". It could just as easily be titled "500% rises are followed by inflation" from the same data.

Re: My Favorite Chart on Earth

#48

Post by wlievens » Wed, Jan 19, 2011, 2:58 PM UTC

stoney wrote: post #34

ars wrote: post #18

Earlier quoted context omitted.

Yes, here are a few explanations: Because of compound interest money grows exponentially - the more money you have, the faster it grows. Suppose I start with earning 10,000 a year, but my neighbor earns 20,000. Now suppose we both each 5% raises each year. After 10 years I earn 16288, and he earns 32577. Now graph my income over the years and look at the gap between our incomes. In a linear graph the separation keeps…

Great explanation, thanks! It's that miracle of compound interest turning up again.

The most powerful force in the universe, they say. I love that quote.

Re: My Favorite Chart on Earth

#49

Post by anamax » Wed, Jan 19, 2011, 3:29 PM UTC

ars wrote: post #18

stoney wrote: post #12

Earlier quoted context omitted.

Is there a simple explanation for non-economics types like me of why the linear graph is misleading and the log one is not?

Yes, here are a few explanations: Because of compound interest money grows exponentially - the more money you have, the faster it grows. Suppose I start with earning 10,000 a year, but my neighbor earns 20,000. Now suppose we both each 5% raises each year. After 10 years I earn 16288, and he earns 32577. Now graph my income over the years and look at the gap between our incomes. In a linear graph the separation keeps…

> Suppose we are both businessmen, and we want to see who is better, I start with $100 and manage to grow it to $200, my friend started with $300 and grew it to $450. Who did better? I earned $100, but he earned $150 - clearly he did better right? But if you notice while I doubled my money, he only 1.5'd it. I'm clearly the better businessman, yet I earned less money.

Sorry, that doesn't follow over, at least not at scale.

It's far more common for a given mom and pop restaurant to double its sales than it is for mcdonald's the chain to do so. (It's also more common for a said restaurant to fail than it is for mcdonald's the chain to fail.) That doesn't imply that the folks running said restaurant are better biz folks than the folks running mcdonalds and would eventually overtake mcdonalds.

Exponentials don't persist.

Re: My Favorite Chart on Earth

#50

Post by brc » Thu, Jan 20, 2011, 12:50 AM UTC

simon_ wrote: post #46

brc wrote: post #37

All very interesting but the author fails to discuss the survivor bias inherent in the Dow Jones Index (or any other index, for that matter). This is the results of the companies that survived. A lot of companies have dissappeared over this time, both through poor performance or going bankrupt. In fact, GE is the only company that has remained on the index since it's inception. So unless you're buying index funds tha…

There is not actually survivorship bias in the DJIA, because changes to its composition are not retroactive. If an index member goes bankrupt, it will absolutely bring the index level down substantially.

That is if they are high flying one day, and bankrupt the next. What usually happens is that they slowly sink in size until they are excluded from the index, and some other up-and-coming company is included. It's not common for a company to go bankrupt and be delisted, but it is common for companies to sink lower and be removed, and then perform very badly from then on as index funds sell them down.

So you're correct in that bad performance by a firm in the DJIA will affect the index, however, really bad performance by a company will not be completely reflected in the index, only the first part of their decline. And that will be somewhat mitigated by the inclusion of their replacement, which is usually a growing company.