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They Did Their Homework (800 Years Of It)

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http://www.nytimes.com/2010/07/04/business/economy/04econ.html?_r=1&ref=business

THE advertisement warns of speculative financial bubbles. It mocks a group of gullible Frenchmen seduced into a silly, 18th-century investment scheme, noting that the modern shareholder, armed with superior information, can avoid the pitfalls of the past. “How different the position of the investor today!” the ad enthuses.

It ran in The Saturday Evening Post on Sept. 14, 1929. A month later, the stock market crashed.

“Everyone wants to think they’re smarter than the poor souls in developing countries, and smarter than their predecessors,” says Carmen M. Reinhart, an economist at the University of Maryland. “They’re wrong. And we can prove it.”

Like a pair of financial sleuths, Ms. Reinhart and her collaborator from Harvard, Kenneth S. Rogoff, have spent years investigating wreckage scattered across documents from nearly a millennium of economic crises and collapses. They have wandered the basements of rare-book libraries, riffled through monks’ yellowed journals and begged central banks worldwide for centuries-old debt records. And they have manually entered their findings, digit by digit, into one of the biggest spreadsheets you’ve ever seen.

Their handiwork is contained in their recent best seller, “This Time Is Different,” a quantitative reconstruction of hundreds of historical episodes in which perfectly smart people made perfectly disastrous decisions. It is a panoramic opus, both geographically and temporally, covering crises from 66 countries over the last 800 years.

The book, and Ms. Reinhart’s and Mr. Rogoff’s own professional journeys as economists, zero in on some of the broader shortcomings of their trade — thrown into harsh relief by economists’ widespread failure to anticipate or address the financial crisis that began in 2007.

“The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.”

“People almost pride themselves on not paying attention to current events,” he says.

In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor.

Much of that theory-driven work, critics say, is built on the same disassembled and reassembled sets of data points — generally from just the last 25 years or so and from the same handful of rich countries — that quants have whisked into ever more dazzling and complicated mathematical formations.

But in the wake of the recent crisis, a few economists — like Professors Reinhart and Rogoff, and other like-minded colleagues like Barry Eichengreen and Alan Taylor — have been encouraging others in their field to look beyond hermetically sealed theoretical models and into the historical record.

“There is so much inbredness in this profession,” says Ms. Reinhart. “They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.”

ONE of Ken Rogoff’s favorite economics jokes — yes, there are economics jokes — is “the one about the lamppost”: A drunk on his way home from a bar one night realizes that he has dropped his keys. He gets down on his hands and knees and starts groping around beneath a lamppost. A policeman asks what he’s doing.

“I lost my keys in the park,” says the drunk.

“Then why are you looking for them under the lamppost?” asks the puzzled cop.

“Because,” says the drunk, “that’s where the light is.”

Economics if full of herdists, it's who academia works. Everyone agrees with each other and you get on. Don't rock the boat get promoted and keep the same lies going as the accepted wisdom.

If only people paid attention to history.

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http://www.nytimes.com/2010/07/04/business/economy/04econ.html?_r=1&ref=business

Economics if full of herdists, it's who academia works. Everyone agrees with each other and you get on. Don't rock the boat get promoted and keep the same lies going as the accepted wisdom.

If only people paid attention to history.

human nature

there are a few who go against the crowd though - although on occassions it is profitable to go with the crowd even though they are wrong

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http://www.nytimes.com/2010/07/04/business/economy/04econ.html?_r=1&ref=business

Economics if full of herdists, it's who academia works. Everyone agrees with each other and you get on. Don't rock the boat get promoted and keep the same lies going as the accepted wisdom.

This is what Nassim Taleb has been saying for years. Everyone loves an all-conquering theory, nobody likes to hear about data that disagrees with their theory.

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human nature

there are a few who go against the crowd though - although on occassions it is profitable to go with the crowd even though they are wrong

Of course providing you cash the chips in at the right time. Trouble is no one knows when it's going to implode and the longer you play the more you will believe it really is different this time and even if it's not your clever enough to spot when the 5h1t will hit the fan. However greed will over take common sense and I suspect most will lose out as they will fail to spot the moment when they should exit.

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This is what Nassim Taleb has been saying for years. Everyone loves an all-conquering theory, nobody likes to hear about data that disagrees with their theory.

yep you cant control the market there are too many unknowns - still we have many highly paid psychopaths whose jobs depend on control

Approach to models linked to Austrian School

Taleb opposes most economic and grand social science theorizing, which in his view suffer acutely from the problem of Platonicity. In an article titled "The pseudo-science hurting markets",[34] Taleb called for the cancellation of the Nobel Memorial Prize in Economics, saying that the damage from economic theories can be devastating. In his criticism of models, Taleb has taken a point of view in line with the Austrian School of economic thought. He opposes top-down knowledge as an academic illusion and believes that price formation obeys an organic process.[35] His paper with Espen Gaarder Haug [35] asserts that option pricing is determined in a "heuristic way" by operators, not by a model, and that models are "lecturing birds on how to fly", except that in the case of options, the birds might listen. In the book "Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?" Wiley Publishing (2009),[36] Pablo Triana explores this topic with references to Haug and Taleb and critiques of the Black-Scholes-Merton model.

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You don't have to buy the book, the original paper is available here:

http://www.economics.harvard.edu/faculty/rogoff/files/This_Time_is_Different.pdf

and is a very entertaining read.

This was part of the first post in the Sovereign Default Watch thread a while ago:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=131198

But I would strongly recommend you buy the book for the data sets alone. It was my Christmas book for 09 and I have found it very helpful to understand the background and the events surrounding the EZ crisis this year.

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http://www.nytimes.c...=1&ref=business

Economics if full of herdists, it's who academia works.  Everyone agrees with each other and you get on.  Don't rock the boat get promoted and keep the same lies going as the accepted wisdom.

If only people paid attention to history.

and indeed so are companies. The current failures at the Banks and BP were all about "shut up and keep your head down, we have expert management that we pay a lot for and they know what they are doing"

In reality its now time to sack all these layers of boomer management - they are past it and the skills that server in the 1970s, 1980s and early 1990s are no longer relevant.  We actually need to start innovating now.

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In any great organization it is far, far safer to be wrong with the majority than to be right alone.
Do not be alarmed by simplification, complexity is often a device for claiming sophistication, or for evading simple truths.

JK Galbraith

Edited by interestrateripoff

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Do not be alarmed by simplification, complexity is often a device for claiming sophistication, or for evading simple truths.

JK Galbraith

This is rife in the economics literature. There seems to be a culture of choosing opaque variable names and using arbitrary Greek letters where standard meaningful Latin characters would often be much clearer. It makes their papers more difficult to read than, say, a paper written by a mathematician. All part of excluding people and making trivial ideas seem complex.

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http://www.nytimes.c...=1&ref=business

Economics if full of herdists, it's who academia works. Everyone agrees with each other and you get on. Don't rock the boat get promoted and keep the same lies going as the accepted wisdom.

If only people paid attention to history.

I think this can be applied to any branch of academia, especially ones that see a particularly large funding pool - see what James Lovelock said about mutually confirmatory career scientists in climate science.

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At one time my job involved evaluating proposals for new pharmaceutical products from start ups and inventors.

I came to realise that any idea that could not be explained in simple language to a non-scientist was either wrong or a con.

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<br />yep you cant control the market there are too many unknowns - still we have many highly paid psychopaths whose jobs depend on control<br /><br /><br />
<br /><br /><br />

"He opposes top-down knowledge as an academic illusion"

Great larf!

The Parthenon - that temple(ahem) to knowledge (on the hill . . . .)

Is now described as an old-times, Greek Fort Knox!

There is no evidence of any sort of worship going on - except to the gold/silver gods!

Woz where they stuck all their 'accumulated' lolly that they taxed and coerced out of the peoples of the surrounding med states that they had conqured!

"The Golden . . 'fleece'"

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Economics if full of herdists, it's who academia works.

unfortunately the same is true of politics and in fact the same is true of the entire population, and I'm not just talking about the sheeple.

Humans are biologically herd prone animals so its hardly surprising that the analysis of the economics of a herd based race also exhibits significant herdiness.

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This is rife in the economics literature. There seems to be a culture of choosing opaque variable names and using arbitrary Greek letters where standard meaningful Latin characters would often be much clearer. It makes their papers more difficult to read than, say, a paper written by a mathematician. All part of excluding people and making trivial ideas seem complex.

This is how cliques are formed in all walks of life: take a simple subject and wrap it in a complex set of descriptions so it can only be understood by the clique.

True for finance, art, sport, IT and so on.

All because humans need to be part of a heard.

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  • 150 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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