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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."
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.
... 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
davecb@spamcop.net
You should read more Greek tragedies like Oedipus
I can't hear that name without thinking of another bad mother(shut your mouth).
Exactly how are they claiming success? Over the past 6 months (their claimed timeframe), gold (or the very close proxy, GLD), is up a bit vs. the Dow and S&P 500, and down a bit vs. NASDAQ. That's hardly a popped bubble.
"National Security is the chief cause of national insecurity." - Celine's First Law
How many bubbles did they miss?
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 it weren't for deadlines, nothing would be late.
A futures market for Shroedinger's cat? Sign me up for that.
A few other thoughts along those lines: Warren Buffet said, "In the short run the market is a voting machine, in the long run it's a weighing machine".
What's interesting about that comment is that he never said what it weighs. People usually infer that it's the value of the company, since Buffet is a value investor. OTOH, the market might really be weighing a number of other things. It might be weighing how much money you have in the first place, since the rich can afford better equipment and advice. It might be weighing the ping time from your office to the exchange, as we've seen with high-frequency traders. It might actually be weighing your skills, and that last one leads to something else.
Let's say, for the sake of argument, that skillful players really can beat the market. Furthermore, let's say that the top 1 % win and the bottom 99 slowly lose. We would expect the 99 to drop out of the market if they were rational. Therein is a fundamental flaw with economics. It assumes people are rational. This is Greenspan's self professed mistake, although IMHO he also failed to realize that firms aren't people and that the people who ran firms into the ground were behaving rationally with respect to their own self-interest (greed). The people who "believed", CEOs, contrary to numbers, were less rational.
So the way I see it, bubbles will continue for the same reason Las Vegas exists. People aren't rational, and nobody really knows where the wheel will be until we OBSERVE that it has stopped spinning.
For all intensive purposes, "whom" is no longer a word. That begs the question, "who cares"?
> Only time will tell if they are truly on to predicting crashes.
That and how rich they get betting on their predictions.
Warning: this article may contain humor, sarcasm, parody, and perhaps even irony. Read at your own risk.
Ron Paul, Peter Schiff, and other Austrian Economists predicted these bubbles for some time now
50% for a first try is shitty, it's no better then just guessing.
If you mod me down, I will become more powerful than you can imagine....
Yeah, the US is firing up the printing presses and borrowing the value of all the gold in Fort Knox every few months. Gold must be in a bubble. The algos told me. Paper dollars backed by Ben Bernanke's good looks are better than the one thing that has functioned as currency throughout human civilization. The econophysicists have helped the financial elite and the central bankers create a rigged, casino-style market that systematically steals from the middle class, and you're congratulating them for gambling at a 50% success rate? Is this what passes for 'news for nerds' these days? This ought to make real nerds want to puke.
He once inserted random mutations into his code, just so he could have the experience of debugging.
That's possibly the dumbest thing I've read in a long time.
is someone who sees something that works in practice and wonders if it would work in theory. - Ronald Reagean
After logging in slashdot still does not take you back to the page you were on. It's been that way for 20 years.
Could be a 'bubbles' bubble.
Due to irrational exuberance in the bubbles index, and investors massively buying up the bubbles indexes in anticipation of a bubble.
...Tiny Bubbles.
Have gnu, will travel.
1) Hand out hockey sticks.
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.
This issue is a bit more complicated than you think.
If only we had a powerful and secretive central bank, all of this could be avoided!
Are the things traded actual physical objects?
Yes -> A bubble at least every 30 years is scientifically proven.
No -> You’re good.
At least that is the leading view on stock markets since a long time ago.
Of course the gambling junkies don’t care, and the government and companies are their pockets.
Any sufficiently advanced intelligence is indistinguishable from stupidity.
Only if there was a 50% chance that a given asset market was a bubble.
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.
Luke, help me take this mask off
A 50% success rate means all their predictive tools are no better than flipping a coin; the only difference is their method has kept them employed.
Witches: Double, double toil and trouble; Fire burn, and caldron bubble.
Investor: Am I destined to be king?
Witches: Meh. We give it 50/50.
What was the criteria for evaluating success? TFA says that the impressive result by anyone's standards is that they predicted a crash in gold, which then was roughly flat for the next six months... There is an entire industry of "quants" attempting to do things like this for banks and hedge funds. Of course, they do not publish their results. If you would like to see what a good classification of bubbles looks like, see: http://dealbook.blogs.nytimes.com/2010/01/27/schillers-list-how-to-diagnose-the-next-bubble/. Note also that identifying a bubble is not always sufficient to profit. Julian Robertson of Tiger Fund famously identified the tech bubble - in '97. He subsequently lost billions betting against tech stocks that stubbornly refused to crash until after he had given up.
I think these econophysicists are in error with regard to calling corporate bonds a bubble. A bubble is when prices are out of whack rather than based on some underlying fundamentals. But corporate bond yields were high for a reason. Major companies (Lehman, GM, etc) were going bankrupt left and right. Many companies were being downgraded by the rating agencies. It was the worst recession in 70 years. Of course bond yields were high. People were really worried about default. Now that many companies have started reporting improved earnings though, of course they are returning to normals and the "bubble" is going away. Anyway, the moral of the story is that corporate bonds were clearly not in a bubble.
So, suppose this "methodology" is used to predict a bubble in a particular industry. Suppose that it is wrong. It will still trigger a huge selloff. Suppose, again, that someone using this "methodology" is motivated by personal gain (turns out economists are human, too. Who knew?). Buy low, sell high, as the old adage goes. Well, how better to buy low than to trigger a massive selloff, then swoop in and buy, buy, buy when there is no actual bubble.
Besides, this is all moot point if you abolish the Federal Reserve. See: The Austrian Theory of the Business Cycle
All the market bubbles in the lifetimes of everyone alive to read this post have been noticed as they arrived, and usually foreseen. Indeed, most of them have been created, to be exploited.
The problem is deflating the bubble before it pops. While we probably know how to do that, doing so fails to make those who see and create them as rich as just letting "nature" take its course. And those people are in charge.
Trying to fix "no one could have anticipated X would catastrophically fail" is just further supporting the fallacy that no one could have, or did, anticipate it.
--
make install -not war
Or as I call them, Economists.
That is 50% for false positives, but how about false negatives? Are those just not to be factored in with the effectiveness of this technique? One should also be able to identify markets that were tested and then not identified as bubbles and later burst.
Mine must be faulty, I only get 16.666'.
Confucius say, "Find worm in apple - bad. Find half a worm - worse."
"Econophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynamics."
:).
Guys , news for you : it does not matter that you are using physical models. You are NOT physicist. YOu are mathematician. If the model came from biology instead you would not be an econobiologist. The equation and model you are using MAY come from physic, but if you are applying them onto OTHER domain, then you are jsut do a model from that other domain using math. You may introduce quantic level and incertainty into economy but it ain't quantum physic. You may add distribution and black body like model but it does not make it econothermodynamic. Jeez. There is already a name for this : mathematic applied to economic. Or economath
C. Sagan : A demon haunted world:
http://www.amazon.com/gp/product/0345409469/
visit randi.org
Not to say anything against the financial geniuses of the world, but if even objectively successful investors can miss something as huge as the U.S. housing bubble, it just reinforces my suspicion that those financial types are merely experts on the small scale, and ignorant of the big picture.
The big picture being: population grows. Places where you can find gainful employment are growing at a lesser pace because of limited natural resources. Population density grows disproportionally in areas with lots of Big Business and concomitant employment opportunities. Housing in said areas becomes scarcer and therefore more expensive. People get antsy about having to spend more and more on housing, but demographic inertia prevents the decline in population growth that would bring things back into balance quickly; instead, people start focusing on how rising real estate prices could actually work to their benefit, and buy things that are really kinda out of reach. This leads to real estate prices rising even more rapidly, making the expectation of rising real estate prices a self-fulfilling prophecy. People buy outrageously expensive houses yet feel that they've gotten themselves a great deal, will be able to retire 10 years sooner than they used to expect, a win-win all around. Some sane people realize that this cannot continue because it's just another pyramid scheme that will implode once the market runs out of suckers. Those sane people are a tiny minority that everyone else just laughs at -- financial geniuses included. Then the inevitable happens and the bubble bursts. Bankers get blamed because they made the juiciest profits; people who bought ridiculously overpriced homes consider themselves innocent victims. People who stayed in rented apartments while the world around them went nuts end up just scratching their heads and laughing at the stupidity of it all.
I'm on record as having called the dot-com bubble, the oil spike, and the mortgage crisis. It's not hard to predict bubbles. If you look at historical ratios, it's usually clear when assets are overpriced. Historically, the median house in the US sells for 2x to 2.5x the median income. That's about what people can pay for. That ratio hit 4 nationally, and 10 in some states. It was blindingly obvious that there was a housing bubble.
Dot-com predictions were easy. I had a program which read SEC filings for cash and burn rate, and simply projected when the money would run out. This was far more successful than one would expect. I used to get hate mail from CFOs for that.
The problem is figuring out when a bubble will pop. I expected the mortgage bubble to pop about two years earlier than it did. (Arguably, the Fed's cheap-money policy under Greenspan postponed the inevitable.)
Predictions on the debt side are harder than on the equity side. Public policy dominates the debt world. I don't make political predictions, so I can't say much about the current situation. I've been expecting an interest rate spike for years, but instead we've had a Federal deficit spike as money is pumped into the system. Eventually something will give there, as with Iceland, Greece, and other debtor countries. I'm not sure how that will unwind. We may get an interest rate spike and hyperinflation, which is what usually happens when a currency gets into trouble.
He's got the Wall Street dice. You know, the ones that only roll 6 or 1.
50% is also known as a completely meaningless prediction. Basically, it says the price could go up or down.
Bubbles are theoretically impossible to predict. If there existed any convincing predictable evidence that an asset price was a bubble, then everyone would sell the asset by the point it crosses that threshold, meaning the price would have gone down, contradicting the predicate that it was a bubble.
"Bubbles" are nothing more than post-hoc descriptions of prices that went up and came down, just like "bargains" are the description of prices that went down before going back up. Prices are very predictable - they go up and down.
http://www.accountkiller.com/removal-requested
I buy four lottery tickets over the next four weeks. With 2 of them I win the lottery, and with 2 of them I fail to win anything. Presumably you'd be unimpressed at my 50% success rate?
Igor Presnyakov stole my hat
The building of skyscrapers is a great tool to predict real estate bubbles. When interest rates are artificially low people are able to buy things on credit much cheaper than if the interest rate was at it's natural level. Since most people buy housing based on monthly payment vs what would rent cost the lower rates cause prices to rise quickly. When that happens it looks like land is becoming more expensive so economic calculations can justify building a skyscraper which is a way to pack more area into less land. Recessions/Depressions seem to follow record setting skyscrapers. Empire State/ Chrysler building finished in the 1930's. World Trade Center/Sears tower 1970's Dubai's many towers/ Shanghai Towers 2000's. http://mises.org/daily/3038
I love Jesus, except for his foreign policy.
I wonder if this is a bubble. Naa, I don't want to miss out!
How many more years will slashdot have an off-by-one error on your Score in your profile?
If you think that having a bunch of economists shout "It's a bubble!" will keep others from charging in, then you haven't been paying attention. There is a willing suspension of disbelief on the part of those making a crapload of money off of the bubble of the day. Everyone knows it can't go on, but devil take the hindmost.
1) Physics & Math wonks create elaborate models claiming to predict market behavior.
2) Financial entities lobby for reduced capital requirements to leverage "sure thing"
3) Banks and trading firms leverage themselves to the moon betting on "sure thing"
4) Banks and trading firms sell major investors on "sure thing"
5) Everybody gets rich for a couple of years until everyone is on the same gravy train
6) Markets crash, everyone is overextended and shirts are lost.
7) Wonks defend models as meant to predict "normal" market behavior, not everyone gaming a "sure thing", return to basement promising better models.
Meanwhile, rather than the market doing what markets were meant to do, providing capital for useful productive economic activity and providing "invisible hand", markets become merely get-rich-quick casinos based on split second timing, leverage and lucky guesses. Meanwhile, "useful productive economic activity" gets shuffled off elsewhere.
If any of you are seriously interested on the topic of the boom/bust cycle and why it happens, you really need to read George Soros's latest book. This is the definitive book on the topic. I can't recommend this book highly enough.
Most every company traded on American Stock Exchanges are way overvalued. Many of them are losing money, yet their stock price gets inflated. The ones that do make money are trading at 30+ times earnings. Why would you buy a company that would take over 30 years just to get your initial investment back? Many of them don't pay dividends, so really you'll never even get your initial investment back, unless you find another sucker. The whole thing is complete idiocy. It's just a line of suckers, where the last one out gets screwed.
Bubbles are not unknown to anyone that is even casually paying attention. Everyone knew the dot-com bubble and the real estate bubble were going to pop at some point. The big question is when. Unfortunately, most armchair investors get to the party late and stay too long.
Get to the party early, and when you see the alcohol getting low, get out before everyone else realizes it, or you'll be left to help clean up.
which are not as nicely probabilistic as many social scientists would like us to believe.
Huh? I don't even know what that means. You can say that the distributions aren't particularly nice, but then neither are lots of the distributions physicists routinely deal with. Specatral lines don't even have a second central moment, for example.
Furthermore, the "huge volume of variables" individuals take into account makes it easier to deal with their actions probabilistically, as any physicist will tell you.
You're basically saying "people are magic", which is the same lame excuse that has been used by social "scientists" for decades to try to give themselves a free pass out of empirical reality. Economists are if anything worse about this than other social scientists, as their entire field is based on a false presumption: that one can make make interesting claims about human behaviour when considering only pecuniary incentives.
In physics, economics wouldn't be considered a discipline at all, but rather a useful approximation, like linear response theory. We need a scientific approach to human behaviour that spans the accidental disciplines of sociology, psychology, economics and political science. All of these take a particular approximation of humans as being primary, and then try to "fix up" their flawed model in an ad hoc way when it runs into reality. We have learned again and again in physics that this is the wrong way to go: you need to build a concept of humans that is fundamentally accurate first, then split it into areas of specialized study later on, not the other way around.
Moral philosophy (Adam Smith's field) might have been useful for this were philosophers not so entirely clueless. As it stands, we have no science of human behaviour, although one is likely to arise in the next few decades out of the more rational elements of evolutionary psychology.
Blasphemy is a human right. Blasphemophobia kills.
In the US bubbles might be created simply because people want some place to invest money. As American industry vanishes, moves off shore, etc. there are less and less places to invest that have any real substance. People do not want paper tiger companies whose assets simply deny any ability to be deciphered or any real ratings. So what was left. One could not trust railroads,airlines,automakers, foreign electronics makers nor most store chains. That left housing. Prices went up and up and the bubble popped. So now that people can't put money in land or housing unless they intend to hold the properties for decades just where do they invest without wretched risk or low returns? I know! I'll rush out and buy a bunch of shrimp boats in the Gulf of Mexico. Or how about some beach resorts on Gulf shores?