“So why is it, then, that when it seems obvious that to understand finance you need to understand human behaviour, Finance World continues to insist that finance is `all about numbers’ and can be fully understood using mathematics? Partly, perhaps, because so many of them are mathematicians to start with and they find it difficult to see things other than within a numerical framework. Partly, perhaps also, because many have Type-A personalities and they find it difficult to deal with uncertainty. Yet surely also because so many are reluctant to admit that they may have been wasting their time all these years basing their work on the Markowitz worldview, just as so many unrepentant socialists found it difficult to admit they had been used as Stalin’s `useful idiots’ when the Soviet Union’ collapsed.”
– Guy Fraser-Sampson, The Pillars of Finance: The Misalignment Theory and Investment Practice, page 187. The book is about how, under the influence of mathematics specialists such as Markowitz, a lot of investment decisions got dangerously out of whack with reality, as we saw in 2008. Despite some pushback, a lot of the investment industry on which our pensions and savings depend are in thrall to risk and market ideas that are seriously mistaken. Throw in the joys of central bank fiat money and the rest, you have a problem. I should add that Fraser-Sampson, who is a professional investment figure as well as academic, is a big fan of the Austrian school (von Mises, etc). Even better, Douglas Adams, the 30 Year’s War and The Goon Show make an appearance. What more can one ask for in a book about finance?
No J.P. – you are quite wrong.
As the great Martin W. of the Financial Times has explained……
All one needs to do is lend out money (at high interest rates) and NOT get the loan paid back.
Thus Argentina (and every other country) will prosper (because they will get loans and not pay them back) and everyone else we prosper (because of the high interest rate number on the contract – the contract the borrower then tears up).
Going to law asking for the money to be paid back is wrong – extortion, if only everyone just lent out money (for notional high interest rates) and the loans were never paid back, all will be well.
Or(in short) City people (for the FT is a the leading newspaper still in financial circles) are still reading batshit crazy nonsense.
Seriously…..
Lots of money was pushed out by the Central Banks (Bank of England, Federal Reserve and so on) and they actively encouraged commercial banks (and other such) to pyramid credit money (“broad money”) upon it.
All this credit-money had to go somewhere – and it went into crazy schemes (financial pyramid games, the stock market, property…..).
It still is.
The Capital Structure is still distorted – indeed more than ever.
I remain astonished (utterly astonished) that the whole thing has not fallen apart (in spite of the desperate measures taken to maintain the bubble economy by the Central Banks) by now.
Paul Marks,
Correct both counts.
Don’t fecking blame the maths types.
It is completely impossible to produce a realistic and reliable mathematical model of something as simple as global climate, where all inputs and outputs operate according to known and immutable physical laws. Anyone who thinks that it is possible to create a realistic and reliable mathematical model of a financial system, where virtually all inputs and outputs are driven by irrational, emotional and subjective forces, is simply Bat Sh*t Crazy. And yet they keep on coming.
There’s always been a few crazy correlations in the economy – with the length of women’s hemlines, or the team that wins the FA Cup, or similar-type nonsense. Anyone who bet the farm based on a correlation like that would be dismissed as deluded, and rightly so. And yet pontifications about the health of economies are handed out based upon correlations no more sound than that – and accepted as the result of great knowledge and wisdom. It’s laughable.
The US GDP was reported to have shrunk 2.9% last quarter. On one network, an analyst blames this on reduced healthcare spending due to Obamacare. On another network, another analyst blames it on increased healthcare spending due to Obamacare. Two men say they’re Jesus. One of them must be wrong. But this is what passes for deep wisdom in this arena.
llater,
llamas
@llamas
I completely agree with your comments.
There are jobs for analysts/programmers attempting to create magical algorithms for market prediction, but I can’t say whether they have any success.
In my (small) experience of market trading I found that logic goes out of the window and you have to aquire a feel for the art of trading. It is an art, not a case of following simple rules.
I am always amused by the financial round-up at the end of the day: “X happened today because of Y and Z”. They try to pin movements on completely unrelated items of news. If what they said was true, it would have been possible to predict the movements before they happened – but they can’t do that. Strange, eh?
There are no rules for trading only instinct, Bargain Hunt is a very good example, take every rule you know, write it in a book and then throw it out the window.
I am endlessly fascinated by the relentless claims of the elites, of whatever derivation, i.e., academic, aristocratic, political, priestly, royal, social, wealthy, etc., that they can manage an economy, from the simplest agrarian to the most complex, worldwide technological, when every single example in history is one of failure.
For millennia, the vast majority of humans lived in subsistence societies in which any disruption resulted in the starvation of great numbers, most of which were already weakened by malnutrition and chronic disease.
An endless string of kings and emperors and priesthoods and nobilities of every conceivable creed and color claimed in every case that they could determine how everything was to be done, or allowed to be done, or prevented, or punished.
Humanity crawled from one miserable form of starvation and slavery to the next, all the while being reassured every inch of the way that their betters had everything under control, that the leaders, whatever they called themselves, and however they derived their powers, would make everything all right again, just as soon as they had some more tax money, and more soldiers, and more slaves, and more faithful effort from all the lazy, ignorant peasants.
And if you translate all the gobbletigook into plain language, that’s exactly what this new bunch is saying today, just in fancier language dressed up with lots of complex numbers, graphs, and computer models.
It can’t be said enough, and needs to be said repeatedly right to their smug faces at every opportunity—they don’t know what they’re doing, and never have.
“Complex numbers” VR? Is that deliberate on your part? Certainly it looks to me that a large chunk of the finances is imaginary.
No, Nick, just an adjective applying to the entire list. Now that you remark on it, I recall something called ” complex numbers” from a math class in thr dim, dark past, but not enough to try to be clever about it.
NickM, mathematicians regularly use imaginary numbers in their equations. The square root of minus 1 is a maths essential! Maybe that was warning enough….
The proliferation of ‘mathematics’ in finance is a symptom, not a cause of the problem, which is that which arises when money appears out of thin air from the Central Bank, along with lots of commas and zeros. This fact creates opportunities that would not otherwise exist for the development of financial products, complex financial instruments and investment opportunities that may appear profitable when in an economy without the distortions of a fecund Central Bank, and the fractional reserve banking facilitated by a spigot of fiat money (fractional reserve could exist independently, but at greater peril to its perpetrators and participants).
What is truly worrying is that, in the UK for example, the Bank of England can create £350,000,000,000 in QE and use it to buy assets, thereby creating huge distortions (and huge, new opportunities) that would not arise had those sellers of £350,000,000,000,000 worth of assets had to act economically. Those huge, new opportunities may include scope for the employment of those with mathematical skills to understand the new products that might otherwise be less common.
Yes – it is not really the mathematics that is the problem, it is that the stuff (various forms of stuff) does not really exist in the first place.
Loans that are NOT from real savings (because the real savings are just not there) and so on.
It does not matter if one’s maths is correct if what one is dealing with does not really exist.
Even the commodity markets (gold and silver and so on) are often based on fiction (a polite ways of saying LIES) – gold that does not really exist, silver that does not really exist (and so on).
This bit (that the financial world is a tissue of lies) the enemy (such as the Max Keiser bloke I bang on about) get correct – of course they then go on to push their own lies.
By the way…..
This explains the seeming paradox of so many rich “capitalists” supporting Mr Obama – for example trooping in a couple of days to SUPPORT Mr Obama’s EPA in its efforts to destroy American manufacturing (by vastly increasing electricity prices).
These financial services zillionaires not only produce nothing – their wealth is not even connected to people who produce things (in the past money lenders and traders only prospered if the real economy prospered).
The wealth of these people comes from playing with money the Federal Reserve produces (from nothing) – the real economy does not matter to them (they have no connection to it – UNLIKE money lenders and traders of past times).
So if Mr Obama advocated destroying every mine and factory in the United States (as well as the coal powered electricity grid) they would smile and support that as well.
Why not?
Of course, in the longer term, Comrade Barack Obama has nasty plans for the end of the financial services people also – but they do not think long term (or think they can escape from what was the United States before Comrade Barack, or some other Comrade, sends these two legged pigs to the slaughter house).
As for the Constitution (such as that pesky thing about Congress, not the Executive branch, making laws) – if the Constitution was strictly followed the Federal Reserve (and so on) would not even exist – so one can not expect people who depend on manipulating the flow of funny money, to care about the Constitution of the United States.
They are too busy (like the Financial Times and the Economist magazine) pushing for “monetary and fiscal stimulus” to care about the destruction of the real American (or British) economy. What matters to them is the stock market bubble and the real estate (property) bubble (and so on).
Britain also – after all the God of “Climate Change” must be sacrificed to (even though India and China are building fossil fuel plants every week) – and the wealth of “the City” no longer has any connection to the real economy (the stock market and so on depends on the flew of credit money from the Bank of England and the Credit Bubble it supports), so why should they care about it?
“Don’t fecking blame the maths types.” Of course I blame the math types, NickM, or at least those who toil in the vineyards of economics. They’ve taken what is quintessentially an exercise in applied human psychology and attempted to turn it into a hard science. It doesn’t work because it can’t work; the fundamental assumption is wrong. These people suffer from an advanced case of physics envy. You of all people should appreciate that.
The problem with the “Markowitz worldview” isn’t that it tries to deal with portfolio risk. The idea that the inherent risk in individual securities can offset risk in other securities, in order to minimize the blended risk of an entire portfolio, is an entirely rational and valuable concept. Where it fails is in its definition, and hence the attempted quantification, of “risk”. A rational person would say that the possibility of losing money on an investment is a risk, but that the possibility of gaining money on it is an opportunity. Yet portfolio theory conflates the two concepts: any deviation (up or down) from the regression line is defined as “risk”. With as meaningless a definition as that at its core, it’s no wonder that Modern Portfolio Theory fails so often to produce good financial results for its unfortunate victims.
Laird, is it not a question of considering the moral culpability of those who respond to financial opportunities created by fiat money etc. rather than those whi create those opportunities?
A lawyer whose living derives from advising on regulations he despises, e.g. Anti-trust, and would repeal is not culpable in the way that a lawyer who enforces those same regulations or who votes for their maintenance.
I would go for causes not symptoms.
Mr Ed, I don’t understand your point. Whose “moral culpability” are you speaking about here?