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August 14, 2012

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Anonymous

Survival of the fattest is the more likely outcome in Tory Britain, Eric Pickles being a prime case in point.

Ralph Musgrave

“The market can stay irrational longer than you can stay solvent.” – Keynes.

Diarmid Weir

Ralph's Keynes quote came into my head too! The concept of market equilibrium (where being rational will get the reward) has almost no application to the real world. One reason being that the long-run - essentially by definition - never actually happens. So you can make (or lose) an awful lot of money in the interim!

Tim Almond

Friedman's idea does work. It's just that it sometimes takes a long time.

The main problem is how people in organisations are incentivised. If someone gives the sales team a high target with no consideration of credit risk, they'll sell to bad credit risks. If you punish staff for spending too long on a customer service call, they'll do all they can to get off that call, regardless of whether the customer has to call back.

Agog

Did Friedman really try to invoke a Darwinian model? Pretty dumb if he did. There are far too many suckers born every minute for that kind of stability ever to be reached...

sean

At last. Evolution was never survival of the fittist. It is proberbly the reason Darwin refused to endorse Marx.

Evolution is adaptation to conditions, which is why crocs with a brain the size of a peanut have been around so long, and arguable biological histories most successful species.

The implications are we can never predict the future as adaptations dictate in part future conditions. So Popper was not just right in philosophical terms that historicism is junk, but biology says the same thing.

What we can say is markets are not perfect and act sort of a signpost to a town that will not exisist when you get there.

chris

@ Tim - if Friedman's idea worked, we'd expect to see excess volatility (in stocks, FX, whatever) decline over the long-run. There's no evidence for this. This means either that Friedman was wrong, or that some other factor offset his conception of selection. But what was this countervailing factor?
@ Ralph - Keynes never gave us a formal theory/model or strong empirical evidence for his famous aphorism. Which is another example of someone being right without good reasoning.

Diarmid Weir

@Chris - 'Keynes never gave us a formal theory/model..'

Surely none is needed? The fact that it is possible (which seems pretty self-evident) is all we need to tell us that playing markets as if they were rational doesn't guarantee a profit.

Hudson Cashdan

While I agree with your conclusion: "success even in competitive markets is no proof of ability, wisdom or intellect," your assertions that the hyperinflation trade was clearly and undeniably wrong is more dubious. I think the answer to that question is difficult to ascertain for many reasons:

-Many people fear both inflation and deflation (defaults) and position their portfolios accordingly in order to protect themselves against the "known unknowns," so to speak

-You are assuming that CPI is the perfect measure of inflation whereas the reality is that inflation is a monetary phenomena and the effect on prices is impossible to measure precisely. CPI, for instance, is one attempted (highly gamed) proxy for measuring the effect inflation has on the cost of living. I know the Egyptian/Tunisian rulers whose revolutionary citizens were catalyzed by crippling inflation don't buy into CPI.

-Even monetary inflation is difficult to measure as there are many different kinds of money, from paper currency to credit. One must consider credit money even if Paul Krugman prefers to ignore it so as not to disturb his (wrong) ivory tower models.

-Even if there has not yet been significant inflation, a hyperinflation happens VERY quickly. Perhaps the strong performance of the inflation trade in the face of lack of inflation (if one assumes that is a fact, which I do not) is indicative of an increased probability of a sudden hyperinflation (off a very low probability base).

dBonar

There are lots of examples where one "play" is mostly a random outcome, but consistently winning over time indicates skill. Sports and cards come immediately to mind.

Besides, surely Keynes beauty contest comes to mind. Plenty of people will just try to pick the contestant they think is most beautiful (or the investment they think looks best). The real skill is in picking the contestant that the most other people will think is most beautiful whether or not you agree. It can be "rational" in invest in an inflation hedge both if you expect inflation or if you expect a large number of others to expect inflation.

Luis Enrique

it's not about whether the smart or dumb succeed, it's about whether being smart or dumb increases your chances of success (as I'm sure you recognise). So it would always be a mistake to observe success and reason backwards to smart, but it might be reasonable to observe success and think the person is probably smart, depending on what the probabilities look like.

the question of whether the smart of dumb survive is (again as your recognise) a matter of context, but you have identified here some contexts in which conforming with the current wisdom/fashion matters for career success. So what constitutes being smart of stupid is ambiguous, perhaps it's smarter to recognise this reality and adapt to it - a smart person might recognized tech stocks were over valued, but have gone along with the fad for the sake of their career (perhaps the super smart also quietly prepares for a downturn - this of course is the rational bubble think, planning on selling to a greater fool) whilst somebody like this Tony Dye (whom I know nothing about) could be seen as dumb for having lost himself his job.

NomadUK

Is there a special circle of Hell reserved for blog spammers?

liverpool models

mmmmmm interesting

james higham

Yes it very much looks like the criminal versus the stupid in this upcoming election.

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