This just in: Econometric models bear little relation to reality !
(Also, JFK was shot)
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Source:
Economists’ Grail: A Post-Crash Model
MARK WHITEHOUSE
WSJ, NOVEMBER 30, 2010
http://online.wsj.com/article/SB10001424052702303891804575576523458637864.html
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
"Money is power, & you ought to be reasonably ambitious to have it." —Russell H. Conwell, Temple Univ, 1877
"It's the end of the world as we know it and I feel fine" say the French as consumer confidence in May rose to the highest since Nov '10 as they welcome and get excited about new Pres Hollande. Also, the French 10 yr bond yield touched the lowest on record this morning. June consumer confidence in Germany held at 5.7, just .2 pts off the highest since Mar '11. To the euro bond debate which is now taking on greater rhetoric with those with high bond yields wanting them and those with low ones saying no way, ECB member...
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November 30th, 2010 at 12:32 pm
Looks to me like we’re one epsilon away from equation nirvana.
November 30th, 2010 at 12:32 pm
The Keynesian models worked much better than the models the WSJ covered.
http://krugman.blogs.nytimes.com/2010/11/30/learned-helplessness/
November 30th, 2010 at 12:35 pm
No wayyy. Hey everybody, we landed on the moon!
November 30th, 2010 at 1:08 pm
On the other hand, BR, the standard asset pricing models (which are merely derivative of dynamic general equilibrium) are no different. Do you ever look at an alpha and a beta? Now they tell us indeed!
(To see how all of this stuff related to macroeconomic theory, see this link.)
November 30th, 2010 at 1:13 pm
[...] HatTip to The Big Picture [...]
November 30th, 2010 at 1:16 pm
Just to clarify the above, I’m no fan of dynamic stochastic general equilibrium models as they have come to dominate both finance and macroeconomics. My point is simply that all of the standard asset pricing models spill out of this general framework. Overglance a beta lately?
November 30th, 2010 at 1:27 pm
R = “higher interest rates encourage people to save more and spend less”. Love it.
Do they ever test assumptions or verify a causal linkage like this is any reality based way?
This is right up there with “if we raise taxes 2 % it will discourage people from working more”…
November 30th, 2010 at 1:28 pm
My bad. I didn’t read to the end. I see reality can be included in “Various factors not included in the model”…
November 30th, 2010 at 1:32 pm
Well, it’s obvious to any impartial observer that if they had only included a copy of “Deteriorada” it would have been a complete explanation for all human behavior…
http://monster-island.org/tinashumor/humor/deterior.html
November 30th, 2010 at 2:19 pm
Brilliant! This absolutely leaves no chance of a Black Swan. Especially that “Various Factors not included int he model” part….
All it does is makes me even more convinced to follow another, far simple Model, also called a rule: The Golden Rule.
November 30th, 2010 at 2:53 pm
E, epsilon would be errors (or emotions). Both correspond with a lack of control.
Ltdata’s handle is now up for grabs (you can delete my acct).
November 30th, 2010 at 3:44 pm
peep wonder why they’re referred to as ‘Economagicians’..
the f***ing Hubris of it (Econometrics) is, itself, stultifying..
http://www.thefreedictionary.com/stultify
November 30th, 2010 at 4:11 pm
it’s a religion, economics is based on holding a set of beliefs and then finding something that will confirm and these days if you are a complete shill it pays well.
The grief brought on normal peeps by these charlatans…………….
November 30th, 2010 at 4:24 pm
Economagicians indeed. They would do as well to read goat entrails and study the stars as try to reduce the world of literally trillions of economic transactions every stinking day into their elegant, but meaningless, models.
Anymore, particularly for so-called “leading” economists, economics is just a massive rationalization scheme for justifying viscerally-held political beliefs. Think Paul Krugman, who never met a government program he didn’t like, nor one he couldn’t justify through pseudo-scientific application of his politico-economic philosophy.
Economists are just modern-day priests, sorcerers and astrologists. The application of their cockeyed theories is hardly likely to ever become as mundane as dentists pulling teeth, as Keynes observed the profession should strive for.
November 30th, 2010 at 4:56 pm
Any economic model which fails to allow for irrational expectations and decidedly nonequilibrium economic states (just as there are many physical phenomena which cannot be described by classical equilibrium thermodynamics), is doomed to fail.
I find it especially hilarious that central-bank economists continue to deny the pervasiveness of irrationality and disequilibrium. After all, blowing nonequilibrium bubbles and encouraging irrational expectations is something central banks – especially the U.S. Fed – are expert at. Yet their very own models refuse to admit of that which they themselves create. The lunatics truly are running the asyla.
November 30th, 2010 at 6:03 pm
I asked again, have any of you relied on modern portfolio theory to make investment decisions? Is so, you’re relying on what you call magic.
November 30th, 2010 at 6:05 pm
You can model it
after tax income, sentiment and wealth effect. i have. works pretty good, too.;
This is bogus BS of the right wing fiscal wont work type,
November 30th, 2010 at 6:05 pm
Thanks! I was just trying to figure out what to spend this holiday. That’s the equation I was looking for.
(That said, I think there is value in trying to specify how the important variables are related, and examine the logical consequences of how you think. What’s key is not to mistake a model’s usefulness for its accuracy. The challenge is that the person who *learns* a model probably gives it more authority than the person who *creates* the model.
I hear wall streeters bashing academics for giving them bad models for thinking returns and prices, but the real problem is probably not the academics – most of whom understand the limitations – but the practitioners who want to lever the model up to its maximum, while forgetting that the model is necessarily a simplification of reality. LTCM did have this problem with academics, but that is not a reason to decide *not* to think about things rigorously. It just means that we shouldn’t think about things dogmatically.)
November 30th, 2010 at 8:20 pm
I was on the grassy knoll. I saw everything…there’s a reason I’m rich, bitch! ;-)
November 30th, 2010 at 8:52 pm
What a crock from ivory tower know-nothings with advanced degrees and no simple common sense:” “At an given time people’s consumption will depend largely upon how much they think they’ll be able to consume in the future.”
The problem with these academics is they ignore the clear and simple fact that the vast majority of American consumers cannot defer most of their spending on car payments, mortgages, college, food, energy, healthcare–they have little discretionary spending. It is only a very small upper middle class who have significant enough income to defer based on purchasing power and IRR expectations. This is trickle-down based and as ludicrous and BR pointed out the stock market wealth effect being. It’s a myth conjured up by rich academics catering to their rich patrons to justify more trickle down supply-side policies. Pathetic.
November 30th, 2010 at 11:01 pm
^ Did you not notice the first term with the term called “habit?” That term represents the types of spending that cannot be deferred or adjusted easily. It’s in there, even if you didn’t know enough to read it.
And the relevance of future consumption is also significant. If you think you are going to get a raise, or come into an inheritance, or have a tax cut, or get cheap credit, you are more likely to make a purchase today. That also is reasonable.
Before you call people who have thought carefully about these issues know-nothings and no common sense, you need to understand that not all people with degrees fit the caricature you paint. They are not all in ivory towers, they are not all advocates of trickle-down. They do not all worship their models as God’s truth the way that some practitioners worship their experience (whether relevant experience or not).
Again… it’s dogmatism that one needs to be on guard against, particularly in an evolving market and world, not knowledge. I work with clients and find that the interplay of the theoretical perspective and experiential knowledge is key to building better investing processes. One helps make sense of experience, the other constantly reminds you of the limits of theory.
December 1st, 2010 at 9:45 am
When I read this Times article, my conclusion was that it is very likely that these efforts too are doomed to failure. It may well be that there are too many moving parts in a mature, complex economy to effectively model and, when you mash that up with the general evolution of mankind, it is probable that by the time you get your model to appear to be working reasonably well, it is already obsolete. It is hubris to think we can use such statistical legerdemain to make political decisions on taxes, regulatory action and spending.
December 1st, 2010 at 9:49 am
Economists: All greek to me.
Greeks: not to us anymore, Greece that is, poster child for cocainesianism.
December 1st, 2010 at 10:05 am
The model is incomplete, it’s missing the variable \m/
If we can (random) walk together, we can rock together.
December 1st, 2010 at 11:10 am
Zen master keeps a cat around to learn to scare away dogma.
Being in the present with no leash.