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Comment by danmaz74 | Hacker News Reader

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.

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> 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.

Ok, but you would need to take into account the interaction with other traders' models that are put into play all the time...

yup, building good models is hard. doesn't mean they always produce bad results. billions of dollars of quant hedge fund money prove that.

"essentially, all models are wrong, but some are useful" George EP Box - one of the greatest truths imho :)

'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?

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.

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.

This was probably the most insightful thing I've seen all week. Thanks for making me smile.

Ha, yes, you're right.

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).

People, not computers, make financial crises.

http://en.wikipedia.org/wiki/List_of_economic_crises

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.

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