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My own theory after digging sometime into Economics is that no one seems to have a clear idea what on earth we are actually doing. We all seems to have our own theory, and they all seems to answer half of the question. And in practice none of them currently models the world we have now. And it will take a long time before any of those theory are proved to be correct this time around. May be we can finally say Keynesian is wrong. ( At the expenses of our generation )

And it makes things more complicated when people start messing around with how they measure things, and messing with formulas. Numbers like China which are inaccurate. Inflation number which are messed with by FEDs. IMF prediction model which has been wrong every time for years and it seems its only job is to please or more accurately manipulate the market mindset.

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> My own theory after digging sometime into Economics is that no one seems to have a clear idea what on earth we are actually doing.

I still remember the moment I realized this. It was on the first day of my first class in Economics 101, when the professor began by telling us that economics was a science built upon the assumption that people are rational actors. I thought about all the people I'd ever known, and all the deeply irrational things I'd seen them do, and got the sinking feeling that I had committed myself to studying a field of thought that had chosen the wrong rock upon which to build its church.

> economics was a science built upon the assumption that people are rational actors

You may have taken a statement made in jest literally. Homo economicus is a known fiction. Just as frictionless, airless physics are a known fiction. They're useful, however, for (a) defining a limit or ideal, (b) pedagogical purposes and (c) starting to think about a problem.

Microeconomics makes falsifiable predictions which can be repeated in experiment. (I'll go ahead and quibble over whether macroeconomics is a science. It's closer to an art, like politics. A field with its own rules and lessons worth learning, but without the capacity to experiment and make falsifiable predictions.)

Physics was able to go on from the simplistic models, refine and extend them to both a wide scale and very high quality of theoretical and empirical concurrence in exquisite detail and generality.

On the other hand, economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances.

> economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances

If by "very narrow circumstances" you mean setting pricing, organizing distribution, predicting the effects of price increases and decreases, determining capital costs, making portfolios, and a whole bunch of other stuff that microeconomics makes precise and in a wide variety of circumstances predictably-correct predictions, sure. There is no economics on the Sun's surface.

The second part of your analogy is off.

It's not billiard physics to general relativity, it's billiard physics to fluid dynamics and predicting the exact route of a stick through a set of rapids.

In economics our biggest complaints are around failure to determine that we're near a singularity and failure to predict behaviour through singularities (in a signal processing sense). It's understandable, as we all strongly care about the path of the stick, yet still unreasonable.

Macro is a decent enough tool most of the time, as are traditional fluid mechanics approaches. What we don't have are ultra precise CFD tools but in our arguments we act like we should/do. Sometimes traders think that they do have a great CFD solution and that's how we get LTCM crashes!

Fluids is a pretty good metaphor, but I would say that today we have sufficiently good reproducible physical understanding of fluids that we can generally fly airplanes at a high level of certainty (e.g. turbulence on the wings is both predictable and controlled in the correct ways that the plane does not crash). In comparison we crash the economy and even sub portions of markets periodically (and the last general crash was worse than many previous recessions) - we don't even have a complete picture of which turbulent areas to be wary of economically.

Or to maybe to a more human point, we can carry humans around on airplanes just fine, but don't know how to carry a payload of a nation of humans on a stable and healthy economic vehicle.

Physics deals with relatively simple things compared to economics, because nature is inherently rational once one discovers the rules. Humans, on the other hand, can not be grasped so easily because they change the rules. Even if you "discover" a working theory of human behavior, people may just react by not doing that thing anymore to spite you.

So if you want to have some sort of basic theory, any theory at all that really could work with such subjects, you gotta step waaaay back. The rational actor that actually "works" to build a scientific theory is such a general concept that it has literally zero predictive value. It states that actors make consistent choices, but only for identical choice situations. Thus, even if a microsecond passes, we are not in the same choice situation and all sort of rationality is out of the window.

An actor who chooses chocolate first, and then chooses something else the next second while throwing away the chocolate is can still be rational, it's only about the counterfactual of the first choice situation. Yet, one was able to show that this sort of very general rationality is a necessary condition to writing a formal model of human behavior, in other words the homo economicus is just answering the question as to what ground rules we need to model human behavior in the first place. It is truly an immaterial, philosophical object that is used in all science dealing with human behavior.

It's more to the credit of economists that they actually wrote this out axiomatically instead of hiding it in implicit discussion.

Then, economists went and tried to write falsifyable theories based on data and observation. This has been done with more or less success, but let's not forget that economic science still replicates much, much better than something like Psychology or Sociology, also concerned with human behavior.

By the way, applying physical approaches to economics is called econophysics and is a thing that exists. It's not really a thing that is successful, cause if you treat humans as mindless particles who are just behaving according to some ruleset, you are working with hyper-hyper rational actors. But it exists.

> On the other hand, economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances.

Can you give an example?

Can the field of economics give some rationale as to why the dynamics of money has any sort of stable foundation upon which to reason? Physics has at great pains established that indeed god does not play dice with the rules of the universe, but is mass human behavior that consistent? Is there a unified theory of money that predicts economic cycles from the 16th century as well as the 21st?

Depends on what you mean by dynamics of money. Social science usually features two approaches, one micro approach based on individual decisionmaking, and one macro approach trying to find general rules to aggregates (so mass behavior).

In terms of micro, yes there are pretty consistent theories as to why and how people use money. Probably the most relevant application thereof are in the microeconomics of banking and in so called microstructure models in finance.

In terms of macro, there is of course also a lot of monetary theory as to why people use money in a certain way.

What does not yet exist is a unified theory linking micro behavior to all aggregates. Such models typically rely on some sort of representative agent, which is known and recognized to be deeply problematic in scientific terms of aggregation. Other approaches exist, of course, such as agent based models. But there is no "theory of everything" yet.

Can economics give rationales? Yes. Peek into any course on the theory of money.

But reasoning from micro behavior to aggregates is difficult in social science. We are currently in the process of figuring out better theories of aggregation, but doing so requires using game theory and decision theory in fully interdependent (so for example networked) contexts trough dynamics, so this as of yet also requires a lot of methodological (read: mathematical) machinery that is not yet developed.

That's a dodge. The point in my asking that question is to see if you're sufficiently well acquainted with any meaningful literature to actually provide an example substantiating your claim.

Inverting the question does not obviate the answer to what I asked you. Moreover, as stated your rebuttal question is underspecified: what do you mean by the "dynamics of money" and "stable foundation"? Can I trivially answer this by talking about the relationship between credit and debts, or are you looking for something more specific? You responded to my (very precise and specific) question with a vague, orthogonal dismissal of the entire field.

Why don't you tell me about the "mathiness" in some peer-reviewed economic paper (preferably in a tier 1 journal) that you perceive to only be correlated with real world conditions in "very narrow circumstances"?

Can we please stop repeating this same old attack on economics. Just because economics 101 introduces people to some simplified assumptions does not mean all economics is like that.

That's like saying, well I was reading a programming book about a Ruby and then I laugh at the professor threw the book in his face and said 'One can never make an Operating system with this'.

Honesty, if you truly believe that about economics then you simply have never spent time to actually learn and engage with a wide verity of economics that exists.

A rational actor is one who is able to decide what he thinks about an option, and who makes decisions that are transitive (ie. consistent). In that sense, rationality is still the basis of economics, but this is not what a normal person understands as rationality.

Instead, a more narrow view (partly due to difficulties of dealing with uncertainty, partly due to the context of preferences in a dynamic setting) required adding other behavioral theories which are now rightly considered mainstream in economics as well. All these non-rational actors are still rational in the general sense, in that they make choices based on preferences at some point in time.

There is, by the way, no other science dealing with human behavior that does not assume rationality. In business, this is called "bounded rationality" after Simon, but nowadays is basically and excuse to use rational actors even though we know "they ain't". All sociological actors are rational as well, even though you will rarely find a sociologist write this as a statement. Still, choices are made as responses to the environment of social forces.

Quite generally, it would be impossible to theorize about human behavior if it were irrational. That, in the general sense, would mean that it is not consistent and not predictable and thereby inherently not accessible to science.

What you econ Professor told you is basically correct, but the correct formulation of this you will probably see the first time when you take a course on decision theory or graduate microeconomics.

Well said!

Too many critics focus on pure dollar optimizing rather than value optimizing. We all have different value maximization functions - if you understand that dollars are just one type of value so called irrational behaviour is coldly rational. Dynamic time preferences for money are accepted but dynamic preference functions for other things (status, sense of self, stress level..) are ignored.

They know what they are doing, the main players are extracting wealth. The financial market is one big casino were the bankers can extract as much wealth as possible in the name of providing liquidity. The suckers(masses) are the rest of us via our 401/pension funds. They know what exactly they are doing.

Active traders tend to lose money relative to the “rest of us” passive index investors.

This is something that will not work forever. If 100% of investors were passive, they would get fleeced.

Passive investing works thanks to active investing. Funny huh?

I think passive investing works, on average, because, on average, companies generate profits and increase in value over time. Active investing loses because transactions have costs in terms of management fees, commission and spread and is how stockbrokers make their money.

If 100% of the stocks were passive invested, then the game for banks would be to list companies as fast as possible, with as high capitalization possible. Who cares if its overvalued? nobody is looking. As soon as a stock is publicly listed it gets bought.

IT would not work. Not poorly, it just wouldn't work at all. This tells me that there is a balance on how much active/passive investment can there be, and at some point they will be balance by some criteria.

I agree that passive investing works, but the real story, I think, is that the economy is guaranteed to grow on average if the population keeps increasing and innovation keeps happening.

If the population grows 3%, we have to produce roughly 3% more, so revenues go up roughly 3%, number of employed goes up roughly 3%, so the economy grows 3%.

If I invent a steel manufacturing process that makes steel 3% cheaper, expenses go down 3%, profits go up, supply goes up, prices go down, the economy grows.

If all you do is passively invest, then over large periods of time you should on average see returns of, roughly, population growth + innovation. Even if everyone is passively investing, it's the same thing. If you actively invest, but still invest in the whole market (as any diversified investor does), you get the same thing, minus ~1% towards. If everyone was actively investing before, and the market grew ~8% per year, and now they passively invested, why would the market not gain the same?

No it wouldn't. Everybody could be a passive investor and the economy and your portfolio would just continue to exist.

Passive funds are priced based on the activity of active investors trading underlying securities.

I don't think he's implying that literally everybody trades passively, of course Zuckerberg is going to actively trade his Facebook shares, I'm going to actively trade my stock options at Public Company X, the guy down the street will still rent his house out instead of selling it and investing passively.

Plus, it's not like passive investing causes securities to never be traded, when I buy into a mutual fund I'm buying stock from someone. That someone is probably retiring and selling their securities.

Lastly, most "active traders" just buy a bunch of Blackrock/Vanguard/SPDR index funds anyway and call it a diversified portfolio that only they could deliver.

There would be a price without the constant underlying activity as well. This is basic financial economies.

I get the sense that that relationship will reverse itself as soon as the market turns down. Bear in mind that a day trader can cash out in a second; you and I will will have to wait two business days.

Indexing as a strategy implies staying invested through downturns and not trying to time the market. Selling during downturns and buying during boom times is as wrong as an investment algorithm can possibly be.

And the market might recover in 2 days and that day trader would lose money for nothing.

In reality, trying to time the market rarely works out, and when it does it can often be attributed to luck. In general, just investing every month is the best strategy.

> a day trader can cash out in a second; you and I will will have to wait two business days

Why the delay?

You can log on to your 401k account and move your position over to treasury bonds or something that looks safer, but they will wait two business days to process the transaction. I know from personal experience; don't see much information online about the phenomenon. My guess is that they are legally allowed to do this, probably because they wrote the law.

> they will wait two business days to process the transaction

This was a decision your 401(k) provider made. The proper person to gripe to is whomever in HR chose a cheap provider. (They make up for reduced administrative costs by (a) being less efficient and (b) capturing float.)

Ah, here it is in the FAQ:

"When selling a mutual fund to purchase a fund in a different family, you are selling the mutual fund you own and using the proceeds to purchase another fund in a different fund family. Since you are performing a cross family trade, the settlement date for the sale will differ from the settlement date for the purchase. Typically, cross family trades execute over two business days."

The funny thing is, even though they say "up to 2 business days", the trade was executed at 3:59:59 PM on the dot, on the 2nd business day after I made the request. I'm certain they waited until that moment to execute the trade because legally, they can.

Fidelity is a cheap provider?

> Fidelity is a cheap provider?

No, but they have different tiers of service. In my account, for example, I can sell and purchase intraday. They do what they do for my personal account, which is credit the cash intraday. TL; DR This is not a legal, but contractual, requirement.

It's a legal requirement to some extent unless you have a margin account. Funds take two days to settle. If you sell, buy, and sell again within two days, your account can be suspended for violating SEC rules.

https://www.ally.com/do-it-right/investing/what-are-unsettle...

I see! Good to know. Still, I'm inclined to believe that more people are in my tier of service than are in yours.

Unless they are a market making financial institution, yeah.

Yes, but:

1. Market makers don't make investment decisions or hold positions. They facilitate trading as counterparties to investing parties, but do not drive prices themselves.

2. Market makers would make a terribly poor shadowy cabal, because the amount of capital they collectively manage is in the high single to low double digit billions. Mutual funds, hedge funds and private equity account for trillions.

Is this based on research or just that theoretical model that passives do better while actives churn fees in a zero sum game?

Actively managed mutual funds don't tend to outperform the S&P 500 over the long term, when you account for selection biases (i.e. if you look at a set of mutual funds from a given brokerage, most of them will appear to outperform the index because they've cancelled the ones that didn't; if you actually choose some of those funds, however, they're going to eventually underperform and get cancelled and replaced with a new set of funds).

This selection bias works somewhat like the old sports betting scam:

1. You get 16,000 email addresses from people who want to receive your expert tips to predict NFL games. You send each of them your pick for the Monday Night Football game. You tell 8,000 of them that the home team beats the spread and the other 8,000 that the away team beats the spread. Be sure and include complicated rationales that will seem prophetic after the fact.

2. Of the 8,000 who received the "correct" tip, you send 4,000 of them one pick for Thursday Night Football and 4,000 of them the opposite.

3. Repeat for the Sunday Night game.

4. You now have 2,000 people who think that you can accurately predict who's going to win a football game, because you've done so for three nationally broadcast games in a row, and the odds of that are astronomical! (I mean, they're 1 in 8, but the kind of people who sign up for spammy sports betting tip newsletters aren't necessarily that sharp). Con 10% of them into paying you $50 for your expert tips for the next Monday Night Football game and you've made $10,000 out of 16,000 email addresses and a week's worth of making up shit about football.

(the exception being, with mutual funds, it's the funds themselves that are dropped instead of the poor saps who invested in them).

...

On the one hand, when it comes to active vs. passive investing, you have the Bogleheads and the hardcore efficient-market-hypothesis types who will tell you that every possible rationale you could ever have for ever making an active investment decision is already priced into the market. On the other hand, Warren Buffett spent virtually his entire life overperforming the market. How to reconcile this?

Actually, I think it's entirely possible for active investment to beat the market, but with a LOT of caveats:

1. The market isn't 100% efficient, which is logically equivalent to saying that it's possible for active investment to beat the market. This seems pretty obvious when you put it this way--100% efficiency is fucking magical, it's not a realistic expectation to have of the world--but how efficient is it? 95%? At that point, you're spending a ton of time and effort finding a market opportunity where you can realize a return of $100 instead of $95. That's a lot of work, and if you're smart and diligent enough to make your marginal $5 that way, you're probably smart and diligent enough to make $10 doing real work instead.

2. So let's say you follow your passions, and active investing is it. You work long and hard to find $5 opportunity after $5 opportunity, and nothing else matters to you other than your loved ones, your weekly bridge match, and advocating for tax reform because you think it's ridiculous how low your taxes are. See where I'm going with this? If active investing is hard enough, and lucrative enough, you're not going to go around asking bored salary drones to let you invest their retirement money in exchange for commissions and fees. That's ridiculous. If you know how to beat the market, beat it yourself and keep all the money. In other words, active investing only works if you, personally, are the active investor. It's not a justification for buying mutual funds.

3. So let's imagine that you are literally the single most successful person in the world at active investing. You're a household name, a genius, an "Oracle", you go to the White House and play bridge with Bill Gates and you're in the top ten billionaire list...

...wait, did I say "Bill Gates"? Take another look at that list, while you're at it. If you're really smart, and diligent, and ambitious, and want to get really really rich by working really really hard at it, it turns out actually creating new businesses works out a lot more often than investing in existing ones. Active investing is exactly the kind of field where you would expect massively outsized returns, and yet, once you eliminate out the heirs, heiresses, and developing country oligarchs who ended up with a controlling stake in newly privatized industries through Totally Not Corrupt Processes™, you're a lot more likely to make a huge fortune by getting 2 billion people to use your ad-supported website, selling cheap flat-pack furniture, selling database software to large companies, selling running shoes, or literally doing any other kind of real work.

So, yeah. Active investing can work out for you, but there's no free lunch, and if you have the money to spare and you're willing to put in the work, you might be better off doing something like buying and flipping houses. Sure, you'll spend frightening amounts of spare time covered with sawdust and choking on mold spores, but at least you'll expect that going in.

There will rarely be a perfectly correct model of economics, and there are two main challenges of why that is not something achievable.

First, because economics is the study of exchange, which means the exchange between a human being and another one. Understanding human behavior in its totality is like trying to understand our brains or our own consciousness. It suffers from a halting-problem level dilemma.

Second, because the study of economy tends to be about its application, it will always fail to obtain perfectly predictable results because humans are not perfectly predictable. And humans fight back. It is aking to believing you found the perfect method of making someone fall in love with you: as desirable as it is preposterous to believe you can achieve it.

Whatever model of economics you have, if it has room for 1% of human behavior, rest assured that its enough to take it down.

In my experience, economic conclusions are almost entirely a result of the initial assumptions that their model was built on. Right leaning economists make different assumptions than left leaning economists so they get different conclusions.

I'll be happy if we get the point where we consider Friedman and Hayek to be misguided hacks and put an end to the fundamentalists purveying their damaging economic philisophies.

China is not fudging the numbers. otherwise, it would imply that major US companies that do business with China are also fudging their numbers. Trade with china has surged in recent decades.

they ARE fudging the numbers

China’s 2015 GDP Was Exaggerated By Fake Data, Analysis Shows

https://www.bloomberg.com/news/articles/2018-02-01/china-s-2...

China's average GDP growth has been roughly 30% less than reported, based on the measures of its changes in national lighting

https://www.investors.com/politics/editorials/new-study-shin...

Another Chinese city admits 'fake' economic data

https://www.reuters.com/article/us-china-economy-data/anothe...

They could fudge, using subsidies and dumping. For example free overseas shipping for most small items from Ali Express.

THat's not fudging; China has a deal with the USPS where they get to ship to anywhere in the US essentially for free.

I was talking worldwide not just to the US. Shipping to the US is an example of sth completely different - US actually paying for being taken over https://www.google.pl/amp/s/www.forbes.com/sites/wadeshepard...)

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