Econophysicists Develop and Test "Bubble Index" 221
eldavojohn writes "Oh if only we could identify the bubble markets as they appear, but with all the random variables, it would take some sort of econophysicist to build predictions for that! Well, a team has released a definition of a 'bubble index' that led them to make predictions of bubbles six months ago that would pop between then and now. The four bubbles they selected were the IBOVESPA Index of 50 Brazilian stocks, a Merrill Lynch Corporate Bond Index, the spot price of gold, and cotton futures. Two out of the four were bubbles, with Merrill Lynch being a bubble already popping and cotton continuing to soar into even bubblier status. Still, for your first try, 50% isn't bad. The team learned a lot of new things from the first run, revised their method, selected their predictions for the next six months, and sealed them. Only time will tell if they are truly onto predicting crashes."
Re:Self-fulfilling prophecies (Score:3, Insightful)
Does no-one see the problem here? If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.
It's not a new idea. [wikipedia.org]
Re:Self-fulfilling prophecies (Score:3, Insightful)
The key to the efficient market hypothesis is universal knowledge. Everybody must know everything, reality does not conform.
Re:Self-fulfilling prophecies (Score:3, Insightful)
Re:Self-fulfilling prophecies (Score:5, Insightful)
Re:Self-fulfilling prophecies (Score:5, Insightful)
Except that they won't, for two reasons:
1. Investors are (collectively at least) really stupid. This has been proven time and again.
2. They think "this time, it's different. We know how to prevent this from becoming a bubble."
For instance, there were smart economists saying back in 2006 or so "watch out, there's a housing bubble". And what most of Wall St did was say "shut up, I'm busy counting my winnings".
fifty percent is *NOT* bad (Score:5, Insightful)
I'd rather predict 0%. That way I could reverse the predictions and get100%. 50% means a flip of a coin would work.
It depends on what you're predicting 50% of. If you predict 50% of the winners of a horse race, then half the time you're choosing the right horse. You could probably make a living at the track. On the other hand, if you predict 0% of the winners, you'll go broke betting on the other 9 horses all the time.
Now, instead of 10 horses, imagine hundreds of companies traded on the stock market...
"If your so smart why ain't you rich?" (Score:4, Insightful)
> Only time will tell if they are truly on to predicting crashes.
That and how rich they get betting on their predictions.
50% for a frist try? (Score:2, Insightful)
Gold bubble? (Score:2, Insightful)
Hand out the hockey sticks (Score:4, Insightful)
2) Wait for someone with a graph and utters the words "like a hockey stick" when describing said graph (usually while wildly gesturing and telling you why X is such a good investment, why you should stick with the company, or why "it is different, this time").
3) Beat that person with the stick from step 1.
4) Sorry, no profit, but less pain; Widows and orphans are spared... At the very least it is good cardio and even if you are jailed, you get free room and board.
Re:You Know (Score:4, Insightful)
Ron Paul is a crank who likes woo-woo medical practices despite being a doctor.
Schiff predicted eight of the last two crashes.
Both believe in a now disproven philosophy that self regulated entities "know best" - hows that GFC and the Gulf oil spill working out for you?
Re:Self-fulfilling prophecies (Score:4, Insightful)
That is just simple minded to think we do not want bubbles. We have known since the 1980's that the current path is unsustainable, but was designed to be only transitionary (aka sustain the post industrials until asia's gdp per cap improves). It was thought that the 1990's recession would be the end of the major economic cycle, but the tech bubble and 2000's re-estate bubble slowed the inevitable to this point. It appears we will not be so lucky this time...
In short... It is very easy to see a bubble, and most of us knew exactly what it was. However, to pretend that you want to predict bubbles pretends that you have sustainable system. The current system is not...
Re:Self-fulfilling prophecies (Score:5, Insightful)
The trouble then becomes selecting a group that we can trust with the wealth of nations, and the power to destroy by proclamation.
We could call it the Federal Reserve.
Re:50% for a frist try? (Score:4, Insightful)
Maybe you can look at all the different indexes on the market, guess which ones are a bubble, which ones aren't, and get 50% right.
It is like looking at 1000s of cars in a parking lot, predicting 4 will crash in the next year, killing all occupants, and getting only 2 right.
That is a god damn victory in anyone's languages.
Re:Self-fulfilling prophecies (Score:3, Insightful)
Let's face it, if it has "econo" anywhere in the name of the discipline, it's about 2 levels softer than sociology.
I work in the physical sciences but I think you're being too harsh on economics here, especially with the statement I quoted above. Economics has little predictive power (I believe it's getting there, but that's debatable). What people don't give it enough credit for is its explanatory power (or postdiction if you will). I think its predictive problems arise simply because of the sheer size and level of connectedness of the global economy and the relatively high (effective) free will of its major players.
In other words, I have a feeling that the fundamental laws of (steady state) economics are relatively simple but the system they describe is more complicated than it is complex. It would be the equivalent of someone in my field (physics) trying to calculate the (thermodynamic) state of a system that never even approaches equilibrium - it's a lost cause for obvious reasons. Also, even if economics could describe final equilibria, I suspect it wouldn't be very useful since the timescales between equilibria might turn out to be too large and what we really need is a working non-equilibrium economic theory (and such things are relatively new even in the physics of relatively simple systems). Once the principles of non-equilibrium statistical physics are as well known as the equilibrium case, I predict (ha!) that economics will rise with dizzying rapidity to a highly predictive science. However, the current state of economic theory appears to be developed enough to be able to explain things with reasonable plausibility after they happen (and based on that, to predict future outcomes of similar events with poor but not abysmal accuracy). You have to remember that a complex global economy has not been in existence for a long enough time to accumulate enough data and enough examples of phenomena.
Sociology has neither predictive nor postdictive ability (naming something is not the same thing as explaining it - a folly practiced by many a discipline that (unlike economics) doesn't even attempt to become rigorous). It could have either ability to at least a limited extent if it wasn't so riddled with agendas and so deeply connected with political science (which again could be a noble science if it wasn't doomed to be an opinion factory from the start). As for your rant about the Nobel Prize in economics, this guy [wikipedia.org] has a bone to pick with you =p
Re:We don't need to predict them... (Score:3, Insightful)
Definitely, but that doesn't speak to the question of boom and bust. And the rest of the world rapidly rebuilt with U.S. loans, which in principle should have cause a "south sea bubble" or two (;-))
--dave
Re:Self-fulfilling prophecies (Score:4, Insightful)
Everybody is giving you shit about being an asshole, which can be the impression seen from the drivers who just sat in the long line, but research in traffic has shown that this is exactly the most efficient way to navigate such a condition. Unfortunately, it requires alert drivers, so it doesn't apply to most humans.
I've always found it annoying that everyone slows down at bottlenecks. Bernoulli would recommend that we all speed up to keep the traffic from snarling. ;)