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Haven't we just rediscovered that "money management" is basically pseudoscience? These are the kinds of people who promise to beat the market using their specia

Haven't we just rediscovered that "money management" is basically pseudoscience? These are the kinds of people who promise to beat the market using their special models or skills. On average they fail. When they seem to be doing well for a while, it is because they are playing the Martingale. When someone says "These people manage $2 trillion", it seems like we should take it in the same light as "These people are among the most successful peddlers of perpetual motion machines in the world". Your reaction should be to trust them less, not more, about economic and financial matters.

ryanwaggoner 18y ago
Haven't we just rediscovered that "money management" is basically pseudoscience? These are the kinds of people who promise to beat the market using their special models or skills. On average they fail. No. While they may fail on average, they certainly don't all fail. There are some money managers who are truly brilliant and have consistently had great returns. Granted, these people are few and far between, but that doesn't negate the value of the entire field. Using your logic, you could easily make the case that entrepreneurship is pseudoscience, since almost all entrepreneurs fail, therefore no one should invest with them or trust them.
- nradov 18y ago
  Are they brilliant or just lucky? And how do you tell the difference?
  - deleted 18y ago
    [deleted]
  - ryanwaggoner 18y ago
    That's an entire discussion of its own. My point was that they're not all just lucky.
    - mattmaroon 18y ago
      You can't prove that, and even if you could, you couldn't prove which ones weren't just lucky so the statement is useless.
      - ryanwaggoner 18y ago
        Isn't the argument the same for any field? Can't we argue that successful practitioners in every field may have just gotten lucky, from entrepreneurship to science to anything else? Not being able to prove something empirically doesn't mean that it's automatically invalid, or that we should dismiss it as being unworthy of . People don't start companies because they can prove that they'll be successful, and people don't invest in companies because they can prove that they're going to succeed. They invest because they believe the odds of success are sufficiently high to justify the risk. In the same way, I don't think we've rediscovered that money management is pseudoscience just because most money managers fail to beat the market. That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".
        comatose_kid 18y ago
        Not really - think about a heart surgeon's success rate vs. a money manager over the long term (20 years).
        jimbokun 18y ago
        'That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".' The trouble is, you can come up with a pretty good approximation of a portfolio that reflects the "wisdom" of the broad market on your own. Pick one or a few diversified index funds, follow some guidelines to split up your portfolio between fixed income and equities (maybe add some real estate or commodities if you want to get fancy), and you're done. You might get some suggestions on the particulars of which index fund, or exact allocation percentages, from a money manager but that's not really adding much value. Maybe just a one time consultation. But what if you want to beat the market? Is there someone you can go to and be confident he or she has a good chance to succeed? Well, if such a person exists, you probably will not be able to identify him or her, except maybe if you know as much about money management as they do. Bernie Madoff is the perfect example here. The people who invested with him were not able to distinguish his pyramid scheme scam from a good investing scheme until it was too late. Some of his investors were supposedly pretty sophisticated in financial matters, too. So, you can get the average market return on your own, and you probably can't tell a good money manager from a bad one. That eliminates most of the reasons for employing a money manager, even if good ones exist.
- crux_ 18y ago
  Likewise, if I were to roll a die 100,000 times there will likely be a nonzero number of periods where I roll a 4 or better over 20 times in a row! (Numbers made up because this is arguing on the internet.) Entrepreneurship isn't even a pseudoscience, by the way, in the same sense that raising a family isn't. Apples, oranges. ('Economics' would qualify.)
  - ryanwaggoner 18y ago
    Rolling a die is a truly random act, where the initiator has no control over the outcome. I don't think the same can be said for entrepreneurship, raising a family, or investing. I don't think they're apples and oranges at all. Just as many money managers (investors) may end up getting lucky through no merit of their own, many businesses succeed or fail due to random chance, and many kids turn out horribly even though they grew up in stable, loving homes. Does that mean that your success in entrepreneurship and raising a family are pure chance? I don't think that the YC approach to investment carries the same amount of risk as someone going to crunchbase and investing in random companies they find there. Surely there's some value to studying what has worked in the past and trying to apply it to future endeavors.
    - crux_ 18y ago
      I'm simply pointing out that the existence of successful investors doesn't itself carry any information about why they might be successful. As for the rest, well, yes, it is apples and oranges. What hypotheses does entrepreneurship make about way the world works? Is the purpose of doing so to explain or enlighten? Even religion is more scientific in its goal. It's like calling pottery or engineering or writing a (pseudo-)science. (Ceramic chemistry, physics, or linguistics would all count.... see?)
- tokenadult 18y ago
  There are some money managers who are truly brilliant and have consistently had great returns. Who, for example?

ryanwaggoner 18y ago

Haven't we just rediscovered that "money management" is basically pseudoscience? These are the kinds of people who promise to beat the market using their special models or skills. On average they fail. No. While they may fail on average, they certainly don't all fail. There are some money managers who are truly brilliant and have consistently had great returns. Granted, these people are few and far between, but that doesn't negate the value of the entire field. Using your logic, you could easily make the case that entrepreneurship is pseudoscience, since almost all entrepreneurs fail, therefore no one should invest with them or trust them.

nradov 18y ago
Are they brilliant or just lucky? And how do you tell the difference?
- deleted 18y ago
  [deleted]
- ryanwaggoner 18y ago
  That's an entire discussion of its own. My point was that they're not all just lucky.
  - mattmaroon 18y ago
    You can't prove that, and even if you could, you couldn't prove which ones weren't just lucky so the statement is useless.
    - ryanwaggoner 18y ago
      Isn't the argument the same for any field? Can't we argue that successful practitioners in every field may have just gotten lucky, from entrepreneurship to science to anything else? Not being able to prove something empirically doesn't mean that it's automatically invalid, or that we should dismiss it as being unworthy of . People don't start companies because they can prove that they'll be successful, and people don't invest in companies because they can prove that they're going to succeed. They invest because they believe the odds of success are sufficiently high to justify the risk. In the same way, I don't think we've rediscovered that money management is pseudoscience just because most money managers fail to beat the market. That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".
      - comatose_kid 18y ago
        Not really - think about a heart surgeon's success rate vs. a money manager over the long term (20 years).
      - jimbokun 18y ago
        'That market is itself made up of people who are trying to beat each other, and statistically, most will fail and disappear. That doesn't mean that the market is a failure or that it's "pseudoscience".' The trouble is, you can come up with a pretty good approximation of a portfolio that reflects the "wisdom" of the broad market on your own. Pick one or a few diversified index funds, follow some guidelines to split up your portfolio between fixed income and equities (maybe add some real estate or commodities if you want to get fancy), and you're done. You might get some suggestions on the particulars of which index fund, or exact allocation percentages, from a money manager but that's not really adding much value. Maybe just a one time consultation. But what if you want to beat the market? Is there someone you can go to and be confident he or she has a good chance to succeed? Well, if such a person exists, you probably will not be able to identify him or her, except maybe if you know as much about money management as they do. Bernie Madoff is the perfect example here. The people who invested with him were not able to distinguish his pyramid scheme scam from a good investing scheme until it was too late. Some of his investors were supposedly pretty sophisticated in financial matters, too. So, you can get the average market return on your own, and you probably can't tell a good money manager from a bad one. That eliminates most of the reasons for employing a money manager, even if good ones exist.
crux_ 18y ago
Likewise, if I were to roll a die 100,000 times there will likely be a nonzero number of periods where I roll a 4 or better over 20 times in a row! (Numbers made up because this is arguing on the internet.) Entrepreneurship isn't even a pseudoscience, by the way, in the same sense that raising a family isn't. Apples, oranges. ('Economics' would qualify.)
- ryanwaggoner 18y ago
  Rolling a die is a truly random act, where the initiator has no control over the outcome. I don't think the same can be said for entrepreneurship, raising a family, or investing. I don't think they're apples and oranges at all. Just as many money managers (investors) may end up getting lucky through no merit of their own, many businesses succeed or fail due to random chance, and many kids turn out horribly even though they grew up in stable, loving homes. Does that mean that your success in entrepreneurship and raising a family are pure chance? I don't think that the YC approach to investment carries the same amount of risk as someone going to crunchbase and investing in random companies they find there. Surely there's some value to studying what has worked in the past and trying to apply it to future endeavors.
  - crux_ 18y ago
    I'm simply pointing out that the existence of successful investors doesn't itself carry any information about why they might be successful. As for the rest, well, yes, it is apples and oranges. What hypotheses does entrepreneurship make about way the world works? Is the purpose of doing so to explain or enlighten? Even religion is more scientific in its goal. It's like calling pottery or engineering or writing a (pseudo-)science. (Ceramic chemistry, physics, or linguistics would all count.... see?)
tokenadult 18y ago
There are some money managers who are truly brilliant and have consistently had great returns. Who, for example?