Econophysicists Develop and Test "Bubble Index"

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."

Comments

Self-fulfilling prophecies

[DavidR1991]

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 like seeing into the future and acting upon what you see - by doing that you alter the future itself, making the initial prediction invalid.

Re:Self-fulfilling prophecies

[fractoid]

Right, it's like traffic: if you alert everyone to a blockage somewhere, and everyone reroutes to avoid it, then the alternative routes will get clogged and the original slowed route will now be empty.

That's exactly what you observe on a freeway. There's a merge coming up in the left lane (Australian here, all you backwards U.S. citizens just pretend I'm ambi-dyslexic :P ) so everyone dives into the rightmost lane, which comes to a stop. The fastest way to get through that section of road is to stay in the leftmost lane until the left and middle lanes merge, then try and find a gap in the right lane where some dozy bastard doesn't keep up with traffic. That way you skip the congestion and get into the right lane just as it frees up.

We don't need to predict them...

[davecb]

... in the years after the 2nd world war we used to treat every wild upswing as a bubble and increase the interest rates. Every downturn got a reduction in rates.

It was the same kind of negative feedback that engineers use to prevent oscillation (feedback squeals, for example).

You'll notice it worked. The converse worked much less well.

--dave

Is it really 50%?

[Dice]

How many bubbles did they miss?

Another Tool To Ignore

[cmholm]

Having a new model/metric to play with is nice. But, it wouldn't have made a damn bit of difference with the most recently departed "phantom value". The core issue is that when people are making a lot of money off a hot economic streak, rich people in particular, there's a strong incentive to not screw with the gravy train. Hell, The Economist, for one, had spent three or four years publishing charts and stories suggesting that the western European/North American real estate bubble was unsustainable, and due for correction.

The missing bit of information was exactly what the corrective signal was going to be. The US Federal Reserve - in the person of Mr. Greenspan - could have provided it, but the Fed board is full of conservative bankers that didn't want to rock the GOP's boat. The various Wall Street bankers could have provided it, but instead they were busy putting out increasingly meta-physical financial products to squeeze another round of bonuses out of the market. So instead, they were all Cosmo Kramer, joy-riding the Saab down the expressway for as long as the fumes kept it going.

It doesn't matter what predictive tool you've got, even the Word of the Lord wasn't and isn't going to stop people from trying to grab that extra [your monetary goal here], if there's any money left on the table.