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I think that with economic models used for trading there is also another big problem: Their application changes the model itself. So, even if you had a perfect

I think that with economic models used for trading there is also another big problem: Their application changes the model itself. So, even if you had a perfect model for the market without you applying your model, as soon as you start applying it, the market changes... and this is also true for all the other quants who do the same with their models. IMHO, it was much better when most stock market decisions were mostly based on "fundamentals". Because that way the market was incentivising sound business decisions.

secretasiandan 15y ago
'it was much better when most stock market decisions were mostly based on "fundamentals"' I don't recall such a period. Is there a particular interval you're thinking of?
- dave_sullivan 15y ago
  I've thought there was more opportunity in fundamentals up until Warren Buffet and Ben Graham's the intelligent investor became well known. More people tried to use these methods, thereby increasing demand and decreasing the upside on securities that meet Graham and Buffets criteria. The stock market today is very different from when they got going, although long term I don't know that anything has fundamentally changed, even before robot traders there had always been random and unexplainable noise.
  - Symmetry 15y ago
    Wait, if there was more "opportunity in fundamentals" back then it would mean that stocks were further away from their fundamentals, right? That's pretty much the opposite of what the OP is complaining about.
    - dave_sullivan 15y ago
      Ha, yes, you're right.
    - CWuestefeld 15y ago
      This was probably the most insightful thing I've seen all week. Thanks for making me smile.
- danmaz74 15y ago
  I'm actually not thinking about a specific period, I was just referring (maybe naively) to the time before computer assisted analysis became so widespread (before the eighties, I guess).
  - adamtmca 15y ago
    People, not computers, make financial crises. http://en.wikipedia.org/wiki/List_of_economic_crises http://en.wikipedia.org/wiki/List_of_economic_crises
andylei 15y ago
> So, even if you had a perfect model for the market without you applying your model Actually, most trader's models do take market impact into account. If you had a perfect model for the market, I'm pretty sure that you (as a participant) would be included. In fact, your own actions are the easiest part of the model to get right, because you control them entirely.
- danmaz74 15y ago
  Ok, but you would need to take into account the interaction with other traders' models that are put into play all the time...
  - andylei 15y ago
    yup, building good models is hard. doesn't mean they always produce bad results. billions of dollars of quant hedge fund money prove that.
    - danmaz74 15y ago
      "essentially, all models are wrong, but some are useful" George EP Box - one of the greatest truths imho :)
gldalmaso 15y ago
There is a good reason for the stock market to have become so complex, it's become so that few people can really understand how it works, how to gain from it and who plays with it.

secretasiandan 15y ago

'it was much better when most stock market decisions were mostly based on "fundamentals"' I don't recall such a period. Is there a particular interval you're thinking of?

dave_sullivan 15y ago
I've thought there was more opportunity in fundamentals up until Warren Buffet and Ben Graham's the intelligent investor became well known. More people tried to use these methods, thereby increasing demand and decreasing the upside on securities that meet Graham and Buffets criteria. The stock market today is very different from when they got going, although long term I don't know that anything has fundamentally changed, even before robot traders there had always been random and unexplainable noise.
- Symmetry 15y ago
  Wait, if there was more "opportunity in fundamentals" back then it would mean that stocks were further away from their fundamentals, right? That's pretty much the opposite of what the OP is complaining about.
  - dave_sullivan 15y ago
    Ha, yes, you're right.
  - CWuestefeld 15y ago
    This was probably the most insightful thing I've seen all week. Thanks for making me smile.
danmaz74 15y ago
I'm actually not thinking about a specific period, I was just referring (maybe naively) to the time before computer assisted analysis became so widespread (before the eighties, I guess).
- adamtmca 15y ago
  People, not computers, make financial crises. http://en.wikipedia.org/wiki/List_of_economic_crises http://en.wikipedia.org/wiki/List_of_economic_crises

andylei 15y ago

> So, even if you had a perfect model for the market without you applying your model Actually, most trader's models do take market impact into account. If you had a perfect model for the market, I'm pretty sure that you (as a participant) would be included. In fact, your own actions are the easiest part of the model to get right, because you control them entirely.

danmaz74 15y ago
Ok, but you would need to take into account the interaction with other traders' models that are put into play all the time...
- andylei 15y ago
  yup, building good models is hard. doesn't mean they always produce bad results. billions of dollars of quant hedge fund money prove that.
  - danmaz74 15y ago
    "essentially, all models are wrong, but some are useful" George EP Box - one of the greatest truths imho :)

gldalmaso 15y ago

There is a good reason for the stock market to have become so complex, it's become so that few people can really understand how it works, how to gain from it and who plays with it.