Sunday, January 18, 2009

Why this blog?

I want to connect with people who have overlapping interests with me. For example those who have an interest in the approaches of George Soros, or behavioural economics, or who simply have practical insights from their experience of trading financial markets. Ultimately I aim to work with George Soros and Robert Shiller. So if you've got an interest please contact me, reference me in your blogs, comment and/or direct me to others who maybe interested!

I want to connect with with people who are interested in the study of financial markets because I believe there is a better way for academics, regulators and finance industry participants to understand and study financial markets then the standards methods based around the efficient markets hypothesis. I call this approach "Evidence Based Finance Economics". It means that approaches to financial markets should seek to encompass as much evidence as possible. This evidence includes both the currently studied macro level changes in prices and volumes and as well as the currently ignored micro based evidence on market participants portfolio allocations and decision making processes. This vastly broader set of evidence enables us to both come up with insights that are relevant to individual market participants (as opposed to "the market") as well as continually improve our macro theories and understand the limits to our theories. i.e. understand where our theories apply, how accurate they can be, what aspects of reality are more or less stable over time and which ones may change over time etc.

I believe that because the current approach restricts it's approach to "The Market" is a theoretical dead end that provides little scope for improvement in current theories. The lack of progress in the mainstream study of financial markets over the past 25 years and the complete surprise of economists at the occurrence current financial crisis bears this out.

How did I come to my beliefs?

In a sense this blog begins to complete a circle in my study of financial economics from theory to practical experience and now back to theory. From 12 years from the age of 18 I comprehensively studied the academic and professional literature on financial economics, as well as what I took to be relevant in psychology, philosophy and sociology. During this time I wrote a 250 page long masters thesis that looked at theoretical approaches to expectations formation in asset markets and at the evidence for expectations formation in housing markets. This evidence strongly suggested to me that peoples expectations about future house prices are generally trend following based on the recent (1-3 years) of changes in house prices in the areas in which they live. I was surprised that my approach (looking at a wide range of evidence and seeking to evaluate how various economists insights about expectations formation apply to housing markets) was met with an angry reaction by most academic economists. I was admonished to use the standard and approach and restrict the evidence I looked at to the standard macro economic evidence. The head of my department at the university finally explained to me that academics were not really interested in original research from master students they wanted you to follow the standard recipes. Had he told me this at the start of my thesis it may have saved me 5 years of working on an approach that was never going to be accepted.

I concluded that despite my strong desire to contribute to the study of financial markets a career as an academic economist at this point was virtually impossible unless I simply conformed to the standard methods that I believed to be deeply flawed. So at this point I decided the only way to really show people that I had insights into financial markets was to take my own money and speculate successfully in these markets. This I have now done successfully for ten years.


Why do theories about financial markets matter?

At the broad level they matter if you want the world to be a better place to live where people can make sensible financial decisions that are likely to lead to prosperity rather than disaster and where regulators have a good enough understanding of these markets to enable appropriate regulation. Given the current financial crisis, it's unfolding impact on people's lives and the past and present actions of regulators there is great scope for improvement..

Where to from here?

To paraphrase a private detective movie character. If you're looking for one particular thing it's hard to find it - because of all the things in the world. But if you're looking for anything interesting you will find it - because of all the things in the world.

So approach here is simply to blog about things that I believe are interesting about financial markets and how they are studied. Some of this will be drawn from the academic literature, some of it from other interesting commentators and some of it from my own study of financial markets.

I'll blog about once a week and look forward to hearing from you!

134 comments:

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  3. Interesting post: We are all subject to the financial markets in one way or another either directly or indirectly..I wonder if one studies the markets hard then, would one not take risks for fear of being wrong.

    Regulators sadly failed in their duties by not regulating the greedy banks properly though, they (the banks) probably had been told that they would get a financial bail out..

    Leaving the rest of us to pick up the tab..

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  4. I agree, there's too much reliance on theory and statistical models that severely underestimate risk. That's why I like Nassim Taleb's work. As a trader of binary options forecasting and managing risk is always at the forefront of my investment process and finding models that are reliable is always a goal.

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  5. Cool post, I loved George Soros's book on this. I think the world has yet to catch on. I think it might soon.

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  10. I've always been a proponent of technical data. The fundamentals tend to lie. Fundamentals sell the sizzle not the steak. Technicals can not be controlled by PR or conjecture.

    Controlling technical data is a lot like trying to stop the sun from rising in the east.

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  11. I agree with the previous commenter Philip in that I prefer the theories espoused by Taleb, he seems to have gotten the last few market crashes right.

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  12. Thanks for the post Steve, I enjoyed reading it.

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  13. The stock market is a scary place right about now. I wish the economic conditions improve such that the stock market can move its way back up.

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  14. It sounds like we both got a similar start with very early exposure to finance and the stock market. I'm really impressed with the fact that you wrote a 250 page thesis about the formation of expectations in the markets. How did these findings influence your investing or trading philosophy? Are you more of a buy and hold type investor, or are you a more short term trader taking advantage of your knowledge of people's financial expectations?

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    I wish I was interested in finance when I was 12, maybe I would know what I was doing by now. That’s why I’m in forex trading it’s easier.

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  23. The lack of progress in the mainstream study of financial markets over the past 25 years and the complete surprise of economists at the occurrence current financial crisis bears this out.

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