Wednesday, 7 January 2015

Are you being "Piketty" about other economists?

09:36 Posted by The Thalesians (@thalesians) No comments

I recently wrote an article discussing the "Unusual cult of deriding economists". As the title suggests, I talked about the derision economists can often receive from outside their community, as illustrated by a quick peek Twitter. I argued that criticism of economists is justified, when it is accompanied by a solution, using the example of George Cooper's ideas. In his book, Money, Blood and Revolution, he suggests a circulatory growth model designed to unify the various economic schools of thought. However, the contrasting approach of simply mocking economists for the sake of it, without any attempt to come with an alternative, can amount to something akin to name calling.

One point I missed and which was picked up in Twitter comments in my article (by @LadyFOHF amongst others), is that I failed to identify the biggest group who criticise economists: namely economists! We can find numerous examples of this. Piketty's recent book, "Capital in the 21st Century", is a case in point and a quick Google search can bring up all manner of somewhat unfavourable critiques from other economists, such as the following. Jason Russell picks out the following quotation from Acemoglu and Robinson new paper on Piketty's book:

“It is quite striking that such basic conditional correlations provide no support for the central emphasis of Capital in the 21st Century,”

However, it is not just Piketty that other economists can be a bit "Piketty" about. Anyone who follows economists on Twitter is used to regular sparring matches between (think of the former members of the MPC, Blanchflower vs. Sentance as an example, among many others).

A point made by Jordan Terry (@The_Analyst) seemed to sum up the situation better than I could ever do so. He noted that very often it is the case that political views shape the way people view economics, rather than allowing economics to shape their politics. Hence, they might already have a conclusion based on their political views and work backwards from that to justify it using economics. In the case of Piketty, it amounts to asking which came first, r > g or his book (detractors would say the former, supporters would say the latter).

Indeed, as Aaron Brown notes in his book Red-Blooded Risk, it is easier to work out if an economist is a hawk or a dove from understanding what his or her political leanings are, than it is from reading their published research. The result is that arguments about economics end up being about politics and explains how they can quickly become so vociferous. To some extent, it is difficult to separate the two, because economics and politics are so intertwined.

When we move from economics and closer to the financial markets, the lack of agreement is even more obvious. In fact, the absence of agreement makes a market... after all, if everyone agreed on a price all the time, would there be any volatility? In financial markets, we often encounter reasoning which starts with a conclusion. Whilst, economists might sometimes use economics to justify political views, so traders might work backwards from a trading strategy to explain why it is "good".

Indeed, in recent weeks, I have been grappling with this abstract question of what makes a good trading strategy, in an attempt to select various trading strategies, which I am planning to present at a systematic trading workshop (I should add that, if systematic trading is to you, what bickering is to Twitter, you should sign up for my workshop at alphascope in Geneva here!).

A somewhat facetious answer, would be that a trading strategy which makes more money is better than others that make less. However, this is simply ignoring so many other properties of a trading strategy. What are the drawdowns? What are the volatility of returns? How have each of these trading strategies been constructed? Furthermore, what might be a good trading strategy for one trader, might be inappropriate for another. One trader's idea of acceptable drawdowns might not be palatable for others.

So yes, economists might disagree with one another. However, so do traders when it comes to financial markets (otherwise there would be no market). When it comes to the more abstract question of what makes a good trading strategy, it might be best to agree to disagree. A trading strategy, that is "good" for you and your risk profile, might be unsuitable for others, just as an economic theory might seem "good" only if it fits with your political views. Maybe there really aren't any trading strategies which are right "for all occasions"?

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you! Also come to our Thalesians systematic trading workshop at alphascope, sign up here before Friday 9th January to get a 10% discount.


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