Thursday, December 12, 2013

Shilling out

A recent Nobel laureate has derided his fellow prize winner as “the catholic who has discovered that God does not exist.” He argues that humans are psychologically imbalanced and make irrational decisions. That is fair enough – one has to just observe our leaders in Washington to understand this is a truism. What he misses however is the simple idea that predicting irrational behavior of aggregate markets – a large number of idiots – is not easy. If this is not true, Yale would have amassed all of the world’s wealth by now. One could observe this is not the case – neither for the University nor for its illustrious champion. It is also not true for its foundation – one would imagine with such knowledge, the professor would have helped it a bit. Alas, alpha is not that easy to capture.

Market efficiency has been a lightening rod for many practioners, those who make money by moving money around for no other purpose. It is ironic that an economist of such stature will fall for the same. It is indeed puzzling that the Nobel committee will find such an argument compelling. Getting wrapped in psychology, albeit being good fodder for story telling, is not amenable to creating frameworks for the behavior of large and complex systems. Measuring real estate prices is one thing – many could do that, but imagining how complex systems function in aggregate is another. If one could indeed predict “bubbles,” why not do that routinely – and become the richest man on earth? Is it just the altruistic endeavors in education that is holding him back? or is it that practicing what is being professed is not as easy as it seams?

To make this clear, once and for all, all he has to do is to predict the next bubble and bet his entire career, home and savings on it. Then, perhaps, he can find some disciples.