*** The Official MAGAposting thread ***

[wufwugy]

Is there an economic model that predicts, even retrospectively, what the stock market will do?

What I mean is if you plug into this model variables a through z, things like 'a =reducing regulations', or 'b =cutting taxes' , etc., can that model predict with some sort of accuracy how these things affect the stock market?

Nope. Stocks behave like a random walk. Rational expectations says current perceptions adjust for future expectations. The efficient market hypothesis says that stock prices adjust for all available information. Nobody can predict stock values, probably because not all possible new information can be adjusted for. Economists talk like the experimental data is solid on this. It would be with things like if test subjects know the value of a stock they hold will be less tomorrow, they sell today at a higher price. Probably the reason we can't predict prices is because prices change on information instead of changing on change in price, if that makes sense. And we can't fully model all the information that will be relevant a minute or a day or a month from now, so we can't predict stock prices.

[Poopadoop]

Nope. Stocks behave like a random walk. Rational expectations says current perceptions adjust for future expectations. The efficient market hypothesis says that stock prices adjust for all available information. Nobody can predict stock values, probably because not all possible new information can be adjusted for. Economists talk like the experimental data is solid on this. It would be with things like if test subjects know the value of a stock they hold will be less tomorrow, they sell today at a higher price. Probably the reason we can't predict prices is because prices change on information instead of changing on change in price, if that makes sense. And we can't fully model all the information that will be relevant a minute or a day or a month from now, so we can't predict stock prices.

That's interesting. Do all of these models assume people behave rationally then, but with varying degrees of information?

[Poopadoop]

My basic ideas of quantitative models of economics are:

a) Even if you devised the perfect model, there isn't enough information to feed into the model to allow it to make predictions. I.e., too much of the relevant input to the model is unknown or unknowable.

b) Even if you had all the relevant input, the number of variables and their interactions mean you would need a computer (literally) the size of the moon to do the calcs.

[wufwugy]

My basic ideas of quantitative models of economics are:

a) Even if you devised the perfect model, there isn't enough information to feed into the model to allow it to make predictions. I.e., too much of the relevant input to the model is unknown or unknowable.

b) Even if you had all the relevant input, the number of variables and their interactions mean you would need a computer (literally) the size of the moon to do the calcs.

Yeah that's basically right. Because of this, there is debate among economists about what economics even should be about. For example, there is a big econometrician movement. I don't like it much because it attempts to do what you pointed out can't be done. Interesting to note, Nassim Taleb often discusses how econometricians gets their statistics wrong in the first place. So that's, like, a double negative. I think econometrics is very overused. On the econometric paper I replicated for a class, I felt like the "results" boiled down to data dredging and perhaps overfitting and that the conclusion was easily wrong because of unknown confounding variables. And yet this was a good enough study it was in the textbook.

On the other side are economists who say something along the lines that economics is more about construction of logic and constraints that best model human behavior and resources that we can then derive concepts from. I agree with this side more. The model from which virtually all other economic models derive from is like this, supply and demand. That model is basically about constraints and logic.

[wufwugy]

Yeah that's basically right. Because of this, there is debate among economists about what economics even should be about. For example, there is a big econometrician movement. I don't like it much because it attempts to do what you pointed out can't be done. Interesting to note, Nassim Taleb often discusses how econometricians gets their statistics wrong in the first place. So that's, like, a double negative. I think econometrics is very overused. On the econometric paper I replicated for a class, I felt like the "results" boiled down to data dredging and perhaps overfitting and that the conclusion was easily wrong because of unknown confounding variables. And yet this was a good enough study it was in the textbook.

On the other side are economists who say something along the lines that economics is more about construction of logic and constraints that best model human behavior and resources that we can then derive concepts from. I agree with this side more. The model from which virtually all other economic models derive from is like this, supply and demand. That model is basically about constraints and logic.

Here's a good way of looking at it.

The best models in economics are VERY clear about the ceteris paribus effects of the minimum wage. So, what have the studies shown? Um, well, um, the results are mixed. In fact, certain economists who study it a ton and have an opinion on it curiously seem to find their studies showing the results they want. I'm not suggesting any foul play, but pointing out how experimental economics is very, very hard.

In my estimation, we will never know what the data say about the minimum wage. There are just too many confounding variables. Yet, the logic behind the ceteris paribus effects of the minimum wage are very clear and undisputed by economists.

[Poopadoop]

Interesting to note, Nassim Taleb often discusses how econometricians gets their statistics wrong in the first place.

This relates to my point about a) not having enough information. If there's not enough data to devise a model that gets its basic assumptions about parametrization right, your model is destined to fail.

Stats nerd alert: Taleb's argument was that making assumptions about economic models being normally-distributed when they were better described as fat-tailed is the core flaw of many economic theories, but his is just a specific example of the general principle that if you don't parametrize your model properly, you're fucked - an interesting side note is that the American Statistical Association has said the same thing recently about using p-values in scientific research, or more to the point, using them wrongly)

[wufwugy]

That's interesting. Do all of these models assume people behave rationally then, but with varying degrees of information?

"Rational" is acting according to subjective preferences. So, for the most part, yes. I say "for the most part" because there is some small movement in economics against this idea. And I don't really understand why. The best I have gathered from discussions with some professors is that the "irrationalist" portion emerges in part from redefining things. So what Richard Thaler would call "irrational", traditional Chicago economists like Gary Becker would call "rational."

But yes, we assume the aggregation of investors want more money rather than less money and that they act according to how they perceive to do that.



I almost completely disagree with the "irrationalist" approach. It isn't even economics per se. It started out of psychology. Psychology is fine, but it's not the same as economics. I asked one of my profs (the best one I've had) what the Gary Becker (champion of rationalism) type would think of the Richard Thaler (champion of irrationalism) views, and he said Becker would say something along the lines of how in some technical way the irrationalists might be right but even so it wouldn't change any of the modeling since the modeling attempts to incorporate all possible preferences.

[Poopadoop]

Psychology is fine, but it's not the same as economics.

Didn't Tversky and Khaneman basically blow up some economic ideas with research in psychology? I don't remember the details, but I thought it had to do with people not being able to be rational even if they tried (or something like that). Something about them making poor decisions about risk/reward depending on how the question was framed.

I could have that wrong though. It might be someone else or something else.

[wufwugy]

Didn't Tversky and Khaneman basically blow up some economic ideas with research in psychology? I don't remember the details, but I thought it had to do with people not being able to be rational even if they tried (or something like that). Something about them making poor decisions about risk/reward depending on how the question was framed.

I could have that wrong though. It might be someone else or something else.

You are thinking of something that happened. I'd want to look at the exact studies before having an opinion, but I have some knowledge of what you're referring to.

"Blow up" is more or less right. However, I think that came due to using different definitions. Economists like Gary Becker (and me though I am not an economist) describe those "irrational behavior" results as still presenting the subjects acting according to preferences. The issue is that because of type of input, the preferences can change to something funky.

What BananaStand said the other day about how people change driving speed based on time of day and quantity of drivers on the road might be in part an example of this. Economists out of the Chicago school would say those drivers are acting rationally because even though their preferences changed based on input changes, they are still acting along with what they prefer at that point in time. The "irrationalist" framework doesn't really even acknowledge that idea; instead it redefines "rational" as something along the lines of a certain type of preference and "irrational" as a different type of preference.

The irrationalist stuff probably has a lot of value with how it shows how preferences change. But at least according to my professor who was very fair to the irrationalist stuff, it doesn't change the models.