
Computer model of the Economy explains its instability - nickb
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/15/AR2009021501794.html
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Dilpil
Oh come on. The uptick rule?

Great example of a thought experiment used to contradict the results of
experiments actually carried out under real circumstances. (+ 5 points:
<http://math.ucr.edu/home/baez/crackpot.html>)

Letting traders, market makers, and other market participants make bets on the
value of a stock is vitally important. Liquidity is a good thing, highly
informed markets are a good thing.

Is it really so terrible that insolvent companies' stocks go down?

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yummyfajitas
I believe the hypothesis (supported by the model) was that the loss of the
uptick rule _combined_ with a bubble bursting caused the crisis.

An analogy: I did an experiment. I eliminated the "always back up your data"
rule for a week. Nothing bad happened. Are you going to come up with thought
experiments telling me this is a bad idea, in contradiction of my real
experiment?

I don't actually buy the hypothesis, but it isn't technically a thought
experiment contradicting a real one.

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mblakele
Summary of the article: the elimination of the uptick rule is responsible
(<http://en.wikipedia.org/wiki/Uptick_rule> has some good background).

This is all new to me, and sounds compelling, but I have a question. If the
elimination of the uptick rule in mid-2007 is exacerbating market volatility,
why don't the market authorities (NYSE, NASDAQ) reinstate the uptick rule on
their own?

Is it that they aren't allowed to make their own rules, within the SEC's
regulatory oversight? Perhaps they see the increased volatility as a good
thing for them? Are they so spooked by the current economic weather that they
don't see the larger picture?

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lacker
It is far from clear that the uptick rule has anything to do with volatility,
and the NYSE and NASDAQ want to be impartial third parties; they don't want to
impose restrictions that are controversial among the traders.

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lacker
There are many, many different models that can _explain_ economic instability.
It is much harder for a model to _predict_ what would happen if you changed a
rule. In particular the uptick rule is the sort of thing that could easily
have drastically different effects in a model than in real life, since it is
focused on stopping "panics".

