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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
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.
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.
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.
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?
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
Having read the paper, this is more ridiculous than I initially suspected. Of the four assets that they identified as being "bubbles", all four increased in price since they made the prediction! The only way to ultimately determine if a bubble is a bubble and not a rational increase in prices is by the subsequent collapse. They try to hedge themselves by saying that it changed into "some other sort of regime", ie non-hyper-exponential growth. So if it is flat, or down, or up they are correct. The only instance they claim to be able to predict is that the asset will not increase hyperexponentially. And they even fail at this, in the price of cotton. Sadly, can claim some knowledge in the realm of finance.
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.