
Nobel Prize in Economic Sciences 2013: Trendspotting in asset markets - antr
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/press.html
======
crntaylor
I believe that this is fundamentally good research. But beware if anyone
thinks that you can use this to build a killer investment strategy.

If one tests a simple rule, for example "buy when the shiller p/e ratio dips
below 15 and sell when it hits 20" then indeed, you would have seen some
fantastic results - most obviously in the aftermath of the 2008 financial
crisis, when after adjusting for inflation and dividends, you could have
bought the S&P500 in Feb 2009 for 887.12 and sold it again in December for
1202.03, realizing a 35% return _after inflation_ ).

However, you also would have had the patience and determination to ride out
some extremely tough times - you'd be long stocks for the 1987 crash, and
completely miss out on the pre-2000 tech bubble, for example). You'd also have
to ride out some drawdown that would have wiped out 50% of your capital before
the eventual recovery.

In fact, you'd only have placed six trades in about 125 years --

1\. Buy in April 1882 and sell in 1898, realizing 2.62% annualized, inflation-
adjusted return over 16 years.

2\. Buy in March 1907 and sell in 1928, realizing 1.01% annualized and
inflation-adjusted over 21 years.

3\. Buy in Sept 1931 and sell in 1936, realizing 10.1% annualized over five
years (this was a great trade, as you bought in the immediate aftermath of the
1929-1930 crash, and just before the recovery of the early 1930s)

4\. Buy in Jan 1937 and sell in 1961, realizing 6.79% annualized over 24 years
(another great trade, but you would have had to hold your position over the
second world war, which included some terrifying drawdowns).

5\. Buy in 1973 and sell in 1992, realizing 2% annualized over 19 years.
Again, you'd have to suffer losing over half your capital before you
eventually came out on top.

6\. Buy in Feb 2009 and sell in December the same year, realizing a 35% return
in less than a year (the single greatest trade in the strategy's history,
perhaps indicating how thoroughly depressed markets were after the 2008
crash).

~~~
socrates1998
You are falling into the curve fitting trap that is epidemic in economics.

This is typically what economic "scientists" do, they find a formula that fits
a lot of past data, then they publish it as science.

If they actually used it to make money, then it would be better, but that is
almost never the case.

People who make money in the financial markets don't publish their winning
formulas.

Why? For two reasons.

1) It probably isn't a hard rule or formula. It is probably a combination of
factors that go into a decision that ultimately becomes a "gut feeling". Then,
the best traders, usually get out if the trade doesn't work right away. This
is because something unknown is acting on the trade, and since they have no
idea what it is, they get out.

2) They want to use the formula to continue to make money, and since financial
markets are very dynamic, they formula might not work if a bunch of people
start using it.

~~~
crntaylor
Believe me, I am more than aware of the perils of overfitting!

The purpose of my comment isn't to say that using Shiller's P/E ratio is a
good way to make money. In fact, I'm essentially saying the opposite - that
while I think the research is good, it would be an inappropriate tool for most
individual investors, because of the length of the required time horizon, and
the length and magnitude of the drawdowns you'd have to endure.

As an aside, I believe that your criticisms of economics are misplaced.
Certainly there is plenty of poor research and curve-fitting that gets
published in journals of economics. But there are also extremely capable
economists whose understanding of data-mining bias and overfitting is far in
advance of yours or mine, and who are extremely careful when evaluating models
using historical data.

------
omonra
I really wished they'd always referred to it as 'The Sveriges Riksbank Prize
in Economic Sciences in Memory of Alfred Nobel' to differentiate it from real
Nobels.

~~~
KingMob
Ditto. Alfred Nobel had no intent to create an Economics Nobel, and his
grandson has argued against the economics "Nobel" prize associating with the
family name.

------
carlosgg
[https://www.coursera.org/course/financialmarkets](https://www.coursera.org/course/financialmarkets)

~~~
sten
Wow. I had already signed up for it, but this certainly makes it more
interesting.

------
bachback
Fama was wrong about everything. I think Nassim Taleb should have deserved it,
for actually "predicting" the crises.

[http://www.youtube.com/watch?v=S3REdLZ8Xis&list=PLzfJcwakFwl...](http://www.youtube.com/watch?v=S3REdLZ8Xis&list=PLzfJcwakFwlXX98P1pteZDYHqBUyf3dy2)

~~~
omonra
He predicted the crisis in December 2012?

~~~
bachback
No, he published the Black Swan in 2008, which as a term is now part of the
dictionary. He very thoughtful about the term predictions, so it is much more
a framework for statistical thinking. Actual help work, as opposed to the
nonsense that is currently economics.

~~~
omonra
Umm..ok. But the point of Black Swan is that certain are unpredictable. Yet
plenty of people saw the crisis coming [2,3]. Taleb was not one of them -
please see [0]

If you are a Taleb fan (or just curious), check out this critique of his work:

[0] [http://quixoticfinance.com/tag/nassim-
taleb/](http://quixoticfinance.com/tag/nassim-taleb/)

[1] [http://unpleasantfacts.com/falken-on-
taleb](http://unpleasantfacts.com/falken-on-taleb)

People who actually predicted the crisis

[2] [http://www.amazon.com/Greatest-Trade-Ever-Behind-
Scenes/dp/0...](http://www.amazon.com/Greatest-Trade-Ever-Behind-
Scenes/dp/0385529945)

[3] [http://www.amazon.com/The-Big-Short-Doomsday-
Machine/dp/0393...](http://www.amazon.com/The-Big-Short-Doomsday-
Machine/dp/0393338827/ref=pd_bxgy_b_img_z)

~~~
zurn
At any given moment there are "plenty" of people who think the sky is falling.
How do you account for survivor bias.

~~~
omonra
You know, in billiards (pool) you have to actually point to the hole in which
you plan to sink the bal. So that if the ball ends up in _some hole_ (but not
the one you anticipated), you don't get credit for it.

Same here - if you read the piece ([http://quixoticfinance.com/tag/nassim-
taleb/](http://quixoticfinance.com/tag/nassim-taleb/)) it exlains in detail
how Taleb's claim to predicting the crisis is 100% off the mark (and the said
thing is that he knows it, which makes him a poseur).

------
forgottenpaswrd
"Sveriges Riksbank Prize" != Nobel Price

This is a prize given by the Central Bank of Sweden, not really an unbiased
source. They have a clear agenda to propagate, and it is more about how to get
more money for them for central planning than about economy.

~~~
onebaddude
>This is a prize given by the Central Bank of Sweden, not really an unbiased
source.

The only people who care about the title of the prize are elitists who clearly
miss the point of discussion. This is a prestigious prize in the field of
economic research. I don't see it as more or less relevant because it's called
"Nobel". But thanks for pointing this out in every Economic Nobel thread.

Now, please, explain to everyone here the biases of the Central Bank of
Sweden. Is it because it's run by economists? Who else should be choosing the
prize? Clearly unbiased people with minimal economic knowledge?

Maybe you could provide us with a refutation of the works of Messrs. Fama,
Shiller and Hansen, rather than just waving your hand and dismissing the work
of men, far more accomplished than yourself in the field, as the "propagation
of an agenda".

~~~
vasquez
This prize was created by bankers to celebrate their own
pseudo(mostly)-science.

Everything I've come across suggest that Alfred Nobel detested their ilk, and
wouldn't want his name associated with the prize in any way, shape or form.
That's why the title matters.

~~~
socrates1998
Thank you, this award is really a joke.

Economists, generally, don't use their models in the real world. And when they
do, they lose billions of dollars.

See Myron Scholes. He did it twice.

Because his "science" was flawed.

It drives me crazy that these guys not only get awards, but influence
government financial policy.

~~~
jljljl
What should influence government financial and fiscal policy if not economics?

~~~
socrates1998
Economists, not economics.

The current people who are the "top economists" in the world, are, generally,
ill-fit to their jobs.

Their abilities to assess risk are horrible.

They are making the world a more dangerous place, not safer.

Economics is very complicated, much more complicated than most leading
economists think.

I am talking about people heading the leading economic and financial
institutions today.

They are dangerous because they are overly confident of their horrible
"predictions".

------
rayiner
The term "economic sciences" is about as appropriate as the term "sanitation
engineers." No controlled experiments = not a science. Relevant:
[https://www.lhup.edu/~dsimanek/cargocul.htm](https://www.lhup.edu/~dsimanek/cargocul.htm).

~~~
onebaddude
> _No controlled experiments = not a science._

According to whom?

Wikipedia: _Science (from Latin scientia, meaning "knowledge) is a systematic
enterprise that builds and organizes knowledge in the form of testable
explanations and predictions about the universe._

More importantly: _who cares_?

~~~
widdershins
> in the form of testable explanations

i.e. controlled experiments.

> More importantly: who cares?

Anyone who's interested in the truth.

~~~
lotharbot
> _" testable explanations ... i.e. controlled experiments"_

Explanations can be tested through careful observation of uncontrolled
environments.

------
socrates1998
This is a joke. It's not a Nobel Prize. It's a propaganda award given to
promote economics.

I have a question, how many "Nobel Prize" winning economists does it take to
lose billions of dollars in a hedge fund?

The answer: 2.

Why? Because economists are generally idiots and don't worry about "real
world" applications. They just enjoy listening to themselves talk and win
awards.

Edit: I just looked over the paper. They make no predictions about the future.
They just say "it is possible to make longer term predictions."

Again, since they don't make any predictions, how can this be considered
science?

~~~
davidw
> economists are generally idiots

That's the sort of inquisitive, open minded, intellectually curious, fact-
based sort of approach to the world that I like to see on Hacker News.

~~~
socrates1998
My problem with economists is they call themselves scientists, yet have very
little actual "science".

Science means, reproducible, testable and predictable ideas.

Economists use curve fitting formulas on past data, then call it science.

And, worse, they defend each other. I have taught economics, worked at hedge
fund and studied economics in college.

They work at banks and governments, then use "science" to justify stealing
money from the people they are supposed to be helping.

What happened to all the economists after the recent world economic crisis?

They didn't lose their jobs. They weren't held responsible for their horrible
risk-analysis.

So, yes, they are idiots.

~~~
zmk_
And of course economics==financial economics.

You have a very narrow definition of science as well. If in X years penicillin
stops working altogether because of anitbiotic resitant bacteria will you
start calling biology/medicine not a science?!

Economics deals with an ever changing enviroment.

~~~
socrates1998
> And of course economics==financial economics.

Yes, because of the huge influence of the leading economists have on the world
today.

Economics, in general, is plagued by poor research, poor results, and bad
logic.

They help shape fiscal, monetary and economic policy, yet make horrible risk
assessments, horrible predictions and believe their own bullshit.

>Economics deals with an ever changing environment.

Economics is way more complicated than people will admit. How can you model 7
billion people interacting? It's impossible.

Yet, they give these charlatans huge salaries, awards, real power in
government and don't hold them accountable.

The leading economists (with a couple exceptions) still don't admit they don't
know anything and won't adjust their thinking.

