4 ms·

>what's happening in the United States now, I think it's crucial to have a good understanding of the economy I aver its not crucial to understand economics. It

by dxbydt 15y ago

>what's happening in the United States now, I think it's crucial to have a good understanding of the economy I aver its not crucial to understand economics. It is crucial to understand finance. This view was hammered into us repeatedly at the University of Chicago. The seminal paper, by Mr. Larry Summers, on the distinction: http://m.blog.hu/el/eltecon/file/summers_ketchup%5B1%5D.pdf http://m.blog.hu/el/eltecon/file/summers_ketchup%5B1%5D.pdf or on jstor ( http://www.jstor.org/pss/2327785 http://www.jstor.org/pss/2327785 ) You need to know how to add. You don't need to know about the well-ordering principle. I say this as a math major who would love it if everyone knew why add works in an integral field( ie. Peano arithmetic: http://en.wikipedia.org/wiki/Peano_Arithmetic#Arithmetic http://en.wikipedia.org/wiki/Peano_Arithmetic#Arithmetic ). To quote my professor, there's 2 big portions to econ - the narrative portion and the arithmetic portion. The first is mostly storytelling. Granted, there's some consensus around the arc of that story ( more consensus in micro-econ than in macro-econ ), but its still a story. The second completely ignores the story. It just says if debt is what it is, ie. some x, and inflation is y, what should the CDS be priced at ? ie. if CDS = f(x,y) what should that f look like ? Turns out that question is much more useful and actionable than the story-telling aspect. If somebody told you the Dow fell by 500 points, its more useful ( in a utilitarian sense ) to know what you should do with your personal portfolio, than to know the reasons for Dow's fall (assuming that set of reasons are even knowable). You might think the causation would be useful. It is, to a very small extent, but the actionable portion ie. what you must do, can be understood much more efficiently by simply focusing on the prices of individual instruments that characterize market indices, derivatives on those indices, ETFs that make a play on debt, inflation etc. The fact that there were 10,300 puts at 113 strike on the August DIA yesterday is more useful than what any individual economist thinks. It tells you that the short term consensus view of Dow is 113*100 = 11300 ...the trend is down-sloping in the short term. Ironically, Summers said finance guys were mere ketchup economists. The dept. of Ketchup pays ketchup economists huge salaries so they could calculate the price of 2 quarts of ketchup if the market told them the price of 1 quart. Whereas "real economists" were engaged in doing research on why a quart of ketchup was priced the way it was ie. due to consumer wages, tomato prices, cost of harvesting tomato, soil conditions etc. Paraphrasing Summers "Ketchup economists reject research of the ketchup market. They believe prices of ketchup are the only hard data worth studying". You may not agree with any of this - but I do urge you to read that paper. Its had a huge influence on the asset pricing community.

Tycho 15y ago
Just like to say I've been really enjoying your contributions to Hacker News. And thanks for the link to the Summers paper, will give that a read. Thinking about your point though, isn't it more important that the average person understands economics so that they don't vote for economically/financially illiterate policies/politicians?
- dxbydt 15y ago
  Thanks! My finance buddies in IB/PE like to say that finance is the only portion of econ that actually works. The braindead portion = econ minus finance, is only good for academia, a shot at the Nobel and a job at the treasury :) I actually think econ is a huge distraction net-net, because of the compelling number of contradictory narratives that cannot obviously all be simultaneously true. In that event, the only objective function is the asset price. In that sense, its important to latch on to asset prices and functions of those prices, understand how the slopes of those functions change, and then understand how the vector sum changes if you take a bunch of those products in tandem. Personally, I've been able to protect my portfolio only by not getting distracted by the underlying economic explanations( assuming those are even valid, given the dubious nature of the source ie. right-wing economist vs left-wing vs freshwater economist vs saltwater vs libertarian vs pseudo-socialist vs social-democratic vs conservative vs religious-conservative vs fiscal-conservative vs 100 other flavors ) and just focus on market indices that matter and derivatives that hedge those indices in case things go south. I will go out on a limb and claim that if you spend $100 subscribing to 4 trading forums/chatrooms ( whether day-trading or swing-trading or commodities or derivatives or fx ), you are saving yourself a lot of grief than if you spend the same $100 buying econ publications. Atleast the former opinions can be validated by simply buying/selling whatever asset they advocate ( not necessarily with real $, just paper-trade ). The latter cannot be validated at all. I remember attending a lecture where the reputed economist says unemployed people must be taxed at a higher rate because they are consuming oxygen but not paying revenue towards the GDP! That is actually very sound economics from some bizzaro school of thought ( http://healthcare-economist.com/tag/oxygen-tax/ http://healthcare-economist.com/tag/oxygen-tax/ ) taken to its logical conclusion! Rather than think about this dismally depressing scenario, tell me the price of such oxygen contracts and I'll see if the market is sufficiently liquid so I can take a position in those contracts :)

by dxbydt 15y ago

Tycho 15y ago

Just like to say I've been really enjoying your contributions to Hacker News. And thanks for the link to the Summers paper, will give that a read. Thinking about your point though, isn't it more important that the average person understands economics so that they don't vote for economically/financially illiterate policies/politicians?

dxbydt 15y ago
Thanks! My finance buddies in IB/PE like to say that finance is the only portion of econ that actually works. The braindead portion = econ minus finance, is only good for academia, a shot at the Nobel and a job at the treasury :) I actually think econ is a huge distraction net-net, because of the compelling number of contradictory narratives that cannot obviously all be simultaneously true. In that event, the only objective function is the asset price. In that sense, its important to latch on to asset prices and functions of those prices, understand how the slopes of those functions change, and then understand how the vector sum changes if you take a bunch of those products in tandem. Personally, I've been able to protect my portfolio only by not getting distracted by the underlying economic explanations( assuming those are even valid, given the dubious nature of the source ie. right-wing economist vs left-wing vs freshwater economist vs saltwater vs libertarian vs pseudo-socialist vs social-democratic vs conservative vs religious-conservative vs fiscal-conservative vs 100 other flavors ) and just focus on market indices that matter and derivatives that hedge those indices in case things go south. I will go out on a limb and claim that if you spend $100 subscribing to 4 trading forums/chatrooms ( whether day-trading or swing-trading or commodities or derivatives or fx ), you are saving yourself a lot of grief than if you spend the same $100 buying econ publications. Atleast the former opinions can be validated by simply buying/selling whatever asset they advocate ( not necessarily with real $, just paper-trade ). The latter cannot be validated at all. I remember attending a lecture where the reputed economist says unemployed people must be taxed at a higher rate because they are consuming oxygen but not paying revenue towards the GDP! That is actually very sound economics from some bizzaro school of thought ( http://healthcare-economist.com/tag/oxygen-tax/ http://healthcare-economist.com/tag/oxygen-tax/ ) taken to its logical conclusion! Rather than think about this dismally depressing scenario, tell me the price of such oxygen contracts and I'll see if the market is sufficiently liquid so I can take a position in those contracts :)