Really, that entire example of price discovery as a demonstrable core competency and focus of humanity is very interesting to think about. This is a great (and cynical) observation, though it’s much more powerfully delivered in the context of the article:
”Our civilization cares about whether Microsoft stock will be priced at $37.70 or $37.75 tomorrow afternoon.”
This is not a good thing. Vastly more effort is being poured into this than is being dedicated to averting climate catastrophe.
In the future, this era will be looked back on as the pinnacle of the grotesque irrationality and chaos of Capitalism, if there's anyone even left to have such thoughts.
Also, The grand central station analogy is just that, an analogy.
Both of these dangerously oversimplify the phenomenon they try to describe. Modern Markets are unfathomably complex systems.
The Efficient market hypothesis is useful as a tool in reaching approximate, generalized, comprehension (ie: for lays and as a peripheral complement for practictioners), but not at all useful in application (some wonderful historical examples out there, study up!).
The fact is that price and markets are not mechanistic. Price has some seemingly objective measures, but those are actually based on projections of future value.
Price is based on collectively determined projections/belief of future value, sure, but this talk of markets becoming more efficient is moot, as we are seeing that, while reacting faster and in more iterations due to transaction efficiency, those don't help us find a 'better' indexable measure of the future value. Furthermore, transactuon costs have lowered, but it's arguable that the diversity of perspectives governing price have been reduced quite drastically.
1) unquestioning belief in efficient market hypothesis is a classic 'confuse the word-concept rose with the actual rose' fallacy. It doesn't work in making actual decisions.
2) price is a subjective gauge of expected future value. As we arent in the future it's impossible to have a more efficient price, since there is no objectivity with which to match.
3) price finding efficiency ≠ transaction efficiency
4) transaction efficiency has improved concurrently with the hyperstandardization of perspective, method and hypercentralization of participation, which has made price-finding of 'financial markets' much less effective as a universal gauge with any bearing on physical markets composed of commercial transactions with merit to anyone other than speculators in abstract 'markets.'
5. Considering all of the above, your argument that improved transaction efficiency is the same as improved price efficiency, and that faster and cheaper transactions will reduce brain-drain seems about as silly as the 'we don't need to worry about babyloniancivilization-induced mass-extinction because singularity.'
In any case, https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm... makes for some interesting arguments.
There's an argument that a lot of money is made by correcting other investor's mistakes. As below-average investors switch to index funds, competition gets tougher among the remainder who are smarter on average.
But those aren’t arguments you made, and as stated your analogy is so hyperbolic and unsubstantiated it feels like you’re only engaging with the topic to forward an ideological disagreement.
It’s not at all self-evident to me that hyper-efficient price discovery in modern capitalism is comparable to optimizing local maxima until you drive off a cliff. I’m willing to be shown why this is the case, but again, those aren’t the arguments you’ve made.
Summary: LDT is a decision theory that is able to recognise that the decisions of all agents who implement LDT will be correlated. When it makes a decision it knows that it's making the decision for its entire decision-theoretic equivalence class. If it ever decided to knowingly do a thing that is "individually rational" but collectively disastrous, in cases where the personal cost of the disaster outweighs the personal benefits of defecting, then it would be malfunctioning.
I put quotes around "individually rational" because, in light of LDT, CDT is not really rational. It performs worse. It doesn't win.
And, personally, I don't think the old model of decisionmaking was closer to what humans intuitively consider to be sane, effective decisionmaking, I think we had to be taught to be ruthless parasites who can't keep promises, and I hope we can unlearn that now.
One of the roles of government is to impose rules and regulations that steer individual (and corporate) self-interest in directions which are widely agreed to be in the interests of civilisation (like preventing/mitigating climate change) but which would otherwise be ignored or worsened if left to individuals or corporations.
Yes, individuals acting rationally is just the thing. If we look closely enough at a civilisation or other group of people, it does break apart into individuals. The individuals are the ones who ultimately has the capacity to act, and has goals (a utility function) and knowledge to base their acts upon.
Hence the old saw's insistence on "enlightened self interest".
But the message of that section is exactly that doing so is irrational, given that enormous resources are already deployed on that problem.
Which talks about literally bulldozing mountains for the markets.
i think it is worth noting that MSFT has about 7.72 billion shares outstanding; that $0.05 difference represents $386,000,000 in value. and that total market cap moving around is what matters. the stock could recombine tomorrow so the same $386M movement turned into a $100 swing in stock price, or split so that it became a $0.001 swing.
Explain to me again how powerful and intellectually satisfying the hyper-competition of modern capitalism is, please.
I neither endorsed nor condemned a career in finance, nor the ideology of capitalism itself, nor its failings. Please grind your axe elsewhere.
In that vein, I'm not a stock analyst so when I was young, I didn't "grok" what made investors tick. The stock market seemed incredibly boring. Yes, it could make people millions but as an outsider, the idea of looking at numbers all day to get those millions seemed like a hell on earth existence.
The 1993 book "Market Wizards" by Jack Schwager changed all that and completely opened my eyes. It was the first time I had seen the word "thesis" in regards to picking stocks -- as used in the phrase "investment thesis" by interviewees. It immediately let me map it to physicists playing with equations to see which ones correspond better to reality. Just as discovering explanatory equations is intellectually satisfying, the same nirvana happens when investors discover a flaw in an asset price and get proven correct when they exploit it.
Stock investing is sort of like The Ultimate Game of Cunningham's Law and the XKCD cartoon. The insatiable human urge to "correct" other humans results in millions for investors.
If we on HN/reddit see a person claim that "Apple has a smartphone monopoly", we'd would correct the false statement with "No, Apple only has 17% share and Android has 83%". The reward for our correction is invisible internet points that you can't even buy a stick of gum with.
On the other hand, an investor like Michael Burry will notice that other entities are mispricing mortgage backed securities. His analysis shows that they will default. That's his investment thesis. It contradicts statements from smart people like Alan Greenspan and Ben Bernanke -- both who have PhD in Economics. It contradicts smart guys from Bear Stearns and Lehman Brothers. Even his own limited partners in his hedge fund lose faith and withdraw their investments. The 2008 housing crash proves his thesis was correct and he got $100 million in profit. Yes, it must be incredibly intellectually satisfying to prove everyone else wrong especially when they have the same information he does. He just crunched the numbers differently based on different assumptions. Stock picking is not "boring" to people like them; it's a fun intellectual game. I wish had the disposition to play it.
Most (By number) people invest not because they think that market prices are wrong. They invest because it's the only way for someone with limited capital to be an owner, as opposed to a worker.
I'd like to not live under a bridge when I'm 73.
Sure, I understand. My reply was about the bullet points the parent poster highlighted. Instead of long-term retirement savings type of thinking of the average Joe, the bullets from the article were about:
>“Short-term relative pricing of liquid financial assets, like the price of S&P 500 stocks relative to other S&P 500 stocks over the next three months.”
... which attracts physics PhDs, neurologists like Michael Burry, etc.
Sometimes the key to recognizing something is wrong is the ability to categorize it.
1) Implementation often takes one clever person with the requisite knowledge and then everybody copies it if it's a good idea. BitTorrent is a good example. Lots of people could have developed BitTorrent or developed something almost like BitTorrent, but Bram Cohen pulled it all together into one neat, usable package. This modality is probably harder to spot as the "Am I actually clever?" question is difficult to answer with good Bayesian priors.
2) Implementation requires someone with an intersection of skills that limits how many people can exist. My last experience getting an EEG is a good example: the individual pieces of EEG equipment are absolutely primitive to any decent electrical engineer and the user interface to the software is horrifically bad (one step up on reading a paper chart strip). Yet, to improve it, you need an intersection of low-noise analog design, UI programing, signal feature detection and extraction, machine learning applicable to signals, and knowledge of how EEG's work and are used for diagnosis. There simply aren't that many people with all of those characteristics that could move the front forward. However, this modality is VERY easy to spot: "Do I have the intersection of skills necessary to be this person?" is a very straightforward question.
Conversely, on the engineering side, my fellow nerds are almost paralyzed by over-thinking things and wondering about what the "experts" say, if a decision is "safe", agonizing over career moves, etc. The result is a safe, careful life with above-average to upper-class income, but avoiding the risks that would lead to super-charged results.
This essay reads to me like the ultimate nerd analysis of why you should never take any risks. Why start a company when every good idea is taken, and MicroApple AmaGooFace can destroy you the moment you get traction? Why buy any stock when the smartest people on the planet already priced it accurately (surely you don't know more than them)? Why do anything outside of mainstream thought at all?
I assume future chapters of his book will address why the rational market hypothesis is incorrect, or why it can be rational to buy AMZN when the market (obviously) knows more than you, but I wanted to comment on this specific post.
The truth is that infinite opportunities exist to make money, make an impact, start something worthwhile. However there is a limited supply of people with the balls (or ovaries) to seize these opportunities and take the necessary risks. So many people settle for the cushy life, handcuffed to the big company.
The risk takers earn the rewards, and even if they fail, the journey to failure almost always leads to meeting tons of people, tons of opportunities, and a future path that leads back to the cushy high-paying job they tried to avoid.
So buy the stock, start the company, assume you know more than the experts, take the risks. You can always go back to the safe life.
The meme that the s&p's performance +/- is as good as you should expect to do is so bizarre to me. I know where it comes from -- I've read the same stuff about warren buffet's bet and everything else.
After having traded a while myself it's just so hard to believe. I don't think it's axiomatic for people who don't have enough capital to overcome liquidity. I wonder if someone has ever paid a PR firm to perpetuate that idea.
If the PR firm were successful, it would drive more people away from active investing towards index funds, lowering volatility. That would help explain why shorting the VIX has c-c-c-c-clobbered the S&P's performance for a few years. If I start to see news stories about rags to riches stories I'll probably start going long volatility. Haha.
My most successful trades this year have been betting against the consensus. The consensus is hilarious and terrible about a lot of things. I bought shares of a good property/casualty insurance company the friday ahead of irma. It was down like 35% in a month as the news convinced traders florida was going to sink. My theory was that if the storm was as bad as advertised, the stock would move about sideways. If it was anything less than there was money to be made. I was up 20% on the trade by Monday.
In August when North Korea news hype was peaked and missiles were being tested, I shorted the vix hard. I didn't think the panic was sustainable. Because of how much I put on it that was probably my riskiest trade. Made the S&P's YTD twice over in 2 weeks.
In June I saw silver flash crash to 14$ an ounce and that just felt stupidly cheap for such a useful precious metal. Sold it for the S&Ps YTD about a week after. There was no research in this, I was just into hobby jewelry making and thought "hmph that isn't right."
I watch the news pretty regularly and I'm mostly happy to stay uninvested unless I see an opportunity to bet against hype. Then I put about 10-20% of my savings on the hypothesis and I beat the market pretty handily doing that, with less of my cash on the line and everything.
I guess one of these days I'll have so much money my block trades will get me sniped or I'll lose 5x in a row and start investing in the S&P again or something. Haha.
By 'beat the market', I mean have a consistent expectation of outperforming the market by a sufficient amount to justify the effort and risk. Obviously there is a ton of uncertainty, so simply achieving higher returns than a given benchmark is not, for these purposes, beating the market. Unfortunately, that also means it's impossible to ever be 100% sure you have indeed determined a way to beat the market, although obviously the more logical the reasoning behind your approach, and the more evidence of it being successful, the more confident you would be.
So, is this impossible? No. As he even says in the article, the expected equilibrium would be that it's possible to the extent that the professionals engaged in doing it earn just more than they would at their next best alternative. But is it possible to consistently do even better than that, or at significantly less effort? Unlikely. If it were, you would have found the metaphorical 20 dollar bill in the middle of Grand Central Station.
The S&P gives me even less confidence.
The sector rotation often feels so artificial and controlled. Couple weeks ago when Apple had their keynote and the market reacted badly to it, I noticed bank stocks rising the next day about exactly as much as Apple lost market cap. Just feels like there's a smoothing function running on the S&P right now. If that function has operators then there's an enormous and still growing short opportunity for them to someday turn it off.
As for bad trades. I lost a little betting on a biotech rally last week. I've never had a really catastrophic trade though. I tend to aggressively scale my position with my confidence and that's been an effective shield so far.
At which point, the "safe path" guys are already nearing their early retirement.
On the contrary, it analyzes in great detail how you can better calibrate your sense for when you should or shouldn't believe you can do better. Which seems like an improvement both over the "you never can" mindset (which you're arguing against and seem to think the article espouses) and the "you always can" mindset.
To argue that there are no market opportunities for new businesses is to argue that the world is a problem-free happy place to be in. This is clearly and inherently false. Some problems may require more capital than you currently have access to - which is why investors take meetings with the hopes of being persuaded, and many times, you just have to reduce the scope in order to reduce the amount of capital needed. The only real limits are legal and ethical in nature.
Immediately after, Japan experienced real GDP growth of 2.3%, where the previous trend was for falling RGDP. Their economy was operating that far under capacity due to lack of money.6
Given that Japan has been in a slump for nearly 2 decades and that everything tried before didn't work (including stimulus spending), it's reasonable that there would be skepticism.
I don't think this advice is good for the society as a whole, though. Encouraging people to be modest, stand in line, and yield to the majority view by default is a pretty good recipe for a society to become biased toward inertia, often in a very oppressive manner. Japan is one example of such a society. They've made impressive economic and technological progress, but their culture and politics are stuck in a weird loop.
The article you linked to also acknowledges that people who are less epistemically helpless are "the only people who can figure out if something basic and unquestionable is wrong, and make this possibility well-known enough that normal people start becoming willing to consider it." Societies need people like this, even though they share some traits with terrorists.
So although overconfidence and an experimental spirit might lead individuals to have more false beliefs and failures in the short term, encouraging them might be more beneficial in the long term on a larger scale. This is something that both authors could agree with.
I don't know whether Eliezer Yudkowsky would actually be willing to go in this direction, since he looks rather preoccupied with ensuring that each individual human (or AI) makes the best decision at any given time; but since I'm sure he wishes the best for the future of our civilization, I look forward to seeing him pay attention to the social and historical consequences of the individual strategies he's been promoting. A horde of smart robots could behave very differently from a single smart robot if they use the wrong consensus algorithm.
Eliezer's argumentation is bright, inspiring and mostly right. But then Eliezer makes a critical mistake in his reasoning and the overall conclusion is just plain wrong (such as "buy cryogenics").
It's a fully general counterargument against anything.
Having a good meta-instinct for knowing when to cede to conventional wisdom and when to trust your own instincts is like a superpower. It's standing on the shoulders of giants and then reaching a little further.
Building a strong conceptual foundation around this problem could be really useful.
1. The assumption that if its easy than any one would have done it in some markets is very true but is not a universal maxim.
2. You have to search out the markets where that is less true.
To expand on the station analogy with the $20 bill they mention in the middle of the station where the traffic is highest but what about in the alley behind the station or next to the stand with the new careless employee? Arbitrage isnt just limited to the most trodden popular paths (s&p 500). The context always changes the ebb and flow surrounding arbitrage, whereas you cant fight the raging river and expect to beat it, you may find opportunity in a swirling eddie
I.e. the famous scientists were not that smart - they were just the smartest and therefore first to react to the waterline of knowledge in their domain rising high enough.
I'm not sure how common this dynamic is in science and maths. Certainly, as you learn more, your ideas and concepts are inevitably refined. (Like: no plan survives contact with the enemy). But I don't know whether that "refinement" is too subtle to count as a "pivot".
However, serendipity has a storied past in math and science.
Edit: This is embarrassing. I had had written "its" as "it's". I need to find a way to do penance.
I tend to fundamentally disagree with the notion of this paper. For a reason why let's consider something like quantum mechanics and relativity. Right now relativity and quantum mechanics are incompatible in domains where they intersect. There is an absolutely enormous incentive to reconcile this. The Nobel Prize would be little more than a formality for a discovery of this magnitude. And the best and brightest in the world have been working on this for many decades.
So the implication of this paper is that, thus, you probably shouldn't try to improve the work here. Of course that's nonsensical since it's obviously provably in need of improvement. And there will be some individual, or group of individuals, that manage to succeed here and push humanity that much more forward.
He relies on examples that are not falsifiable. The absence of evidence is not evidence of absence. In particular in his stock market example, he argues that it is operating optimally by little more than an appeal to authority and a lack of contrary evidence. It's like saying that no human will be able to run faster than Usain Bolt since lots of people (and massive supporting teams) are spending their lives trying to do just that (with 0 barriers to entry) and all have failed, so there's no reason to believe any given individual could ever do better. Of course the one thing the olympics shows is that records are set only to be broken.
I suppose it depends on your life view, but I think people should pursue that which interests them - even if an objective analysis would lead them to believe that their chances of meaningful (and who gets to determine that?) success are negligible. And I would take this a step further. Not only should people do this but the entire progression of humanity is contingent on people doing this. The people that make true progress in a field tend to love that field. And their progress is more a consequence of that love than any sort of higher level objective analysis of fields where their best chances of success lay.
Maybe it's best to conclude with a simple counter example. He mentions, repeatedly, you should question yourself if you see a $20 bill laying on the floor in a populated area for hours. And this is supposed to be meaningful. However, instead of relying on a likely very rare outside force (somebody dropping a $20 bill) let's consider something that's an entirely typical and common social phenomena - elevators. How many people have come to a crowded area just outside an elevator, only to find that the problem is that nobody has pushed the button? There's certainly a major incentive to push that button, and there's no barrier to entry other than the arrogance of thinking everybody else might be a bit silly - yet time and again we find nobody pushed the button.
 - https://stepsandleaps.wordpress.com/2017/10/17/feynmans-brea...
> He relies on examples that are not falsifiable. The absence of evidence is not evidence of absence. In particular in his stock market example,
The article includes an counter-example, and we all know that they exist. People have bet against the market prices and come out ahead. The article is saying that such an event should not attributed to skill.
That's easily explained by information cascade: everybody tries to assess the situation calmly, notice no one is doing anything, and conclude nothing shall be done. Eliezer gave the example of smoke under the door (vs a fire alarm): the more people in the room, the less likely they are to act.
The $20 bill is very different: while the area is crowed, each individual is alone, and doesn't expect any attention from bending down and picking up the bill.
> The absence of evidence is not evidence of absence.
Yes it is? http://lesswrong.com/lw/ih/absence_of_evidence_is_evidence_o...
The reasoning on this is correct. The problem is, he is arguing from hilariously inaccurate axioms. For instance, he seems axiomatically convinced that "creating trillions of dollars of value" is an objective good. That is totally fine for people ideologically "all in" to ideologically cooky notions of macroeconomics, which is one of the most intellectually shaky disciplines still in circulation.
Since he seems familiar with the "two economists walking down the street" parable, I will offer him this one:
Two economists were walking down the street one day when they passed two large piles of dog turds.
The first economist said to the other, "I'll pay you $20,000 to eat one of those piles of turds." The second one agrees and chooses one of the piles and eats it. The first economist pays him his $20,000.
Then the second economist says, "I'll pay you $20,000 to eat the other pile of turds." The first one says okay, and eats the turds. The second economist pays him the $20,000.
They resume walking down the street.
After a while, the second economist says, "You know, I don't feel very good. We both have the same amount of money as when we started. The only difference is we've both eaten turds."
The first economist says: "Ah, but you're ignoring the fact that we've engaged in $40,000 worth of trade!"
Why- of their own free will- would each economist offer $20,000 to eat the turd? There can essentially only be one answer. They value the schadenfreude or sense of power derived from watching their fellow economist eat the turn at greater than $20,000.
Why would each economist eat the turd? They value an extra $20,000 more than they value avoiding the disgust associated with eating the turd.
Long story short, that $40,000 of seemingly destructive trade appears to have improved both their lives according to their own value functions.
It requires us to posit someone who's money-hungry enough to do something disgusting for a large amount of money and yet who still would spend all of that gain to get some (for-most-people) trivial kick out of seeing someone else do the same.
Well, yes, if two people both had that bizarre preference set, and you fully intuited the implications of that situation, it wouldn't be strange to view it as creation of that much value, because both of them satisfied each other's values.
I don't see how this parable carries more kick than if you cut off the parable halfway through and said, "hah! Someone ate feces for money! That's silly, isn't it?" Yes, bizarre values lead to bizarre outcomes. But then, if that's all you want to prove, then just "go Rule 34" and link some fetish sites.
To the extent that the parable has a valuable lesson, it's "back-and-forth exchange of money for services, if officially canceled out, is a kind of gain in utility that doesn't show up in formal accounting". (E.g. Alice provides romantic satisfaction to Bob, who simultaneously provides romantic satisfaction to Alice. They do not transfer money on net. "We're right where we were before, and didn't create any value." Um, yeah you did.)
Or, if the point is that decisions can be regretted (which you could tweak the Alice/Bob example to include) , sure, but that doesn't shed a lot of light on the Subjective Theory of Value.
The whole point is to draw absurdity to the Subjective Theory of Value -- the claim that, if a trade occurs, the trade must be Good, because both participants (with full information!) made a rational (!) calculation that this trade was in their best (!) long-term (!) interests. I find this proposition -- one that rests at the heart of economics -- to be incredibly dangerous and outrageously wrong, but since our entire economy / political system sort of depends on this being true, I don't know what to do about it.
That the thought experiment is badly constructed is clear once you take the money and indirection out of the picture. Does two - clearly somewhat weird - people agreeing to eat a turd if the other person eats a turd, somehow disprove economics?
Clearly for each of the two people it's the case that they get more from watching the other person eat a turd than it costs them to eat one. Maybe they're perverts. Whatever. Value was actually clearly produced.
See also: http://www.paulgraham.com/wealth.html
In any case, I was just trying to make the point that
a) The turd-trade example does not help the debate about the underlying concepts -- regardless of label -- because it's uses an intuition breaking situation to build intuitions, which is no more insightful than pointing and laughing at people with bizarre preferences.
b) STV is not the same as the thing the parable is criticizing.
 Example comment I remember: https://news.ycombinator.com/item?id=12242525#12243088
If you ever observe a trade that changes GDP in a way that does not correspond to the change in real-world value, the belief is shown to be false. Of course that isn't just a thought experiment, you have to actually do the observations.
I agree that GNP is a terrible measure of real world value (a lot of things increase GNP that decrease human well-being on a global or long-term scale). But if you want to falsify it, you need some other measure. Is the other measure falsifiable?
"But this is just my personal take on the adequacy of 21st-century medical research."
I am guessing that the subtitle of his new book is, 300,000 words on why I have more smarts than everyone else?
The fact is, many people do behave as it is an objective good, if only to justify their own wealth. I think the arguments leans on that more that it leans on the belief that GDP growth is actually a good thing.
And as much as GDP growth sucks as a utility function, it does seem to be correlated with much goodnes. How strongly correlated exactly is the $3^^^3 question.
Just keep in mind that Eliezer is good at suggesting mental frameworks for making decisions, but fails when trying to make the best practical decisions himself.