10½ Lessons from Experience
Metadata
- Author: Paul Marshall
- ASIN: B085JXD811
- Reference: https://amazon.co.uk/dp/B085JXD811
- Kindle link
Highlights
The axiomatic, or what some call Rationalist, tradition has continued to flourish in the post-Second World War period, led by the Chicago School, — location: 73
The kind of mathematics which was fundamental to the Industrial Revolution was basically linear in nature; predictable inputs led to proportionate outputs and axiomatic reasoning could be extended into the physical world. — location: 82
A Taleb support line
The big change is that now computational power is becoming available to deal with much greater complexity – with problems which are non-linear and multi-agent. We no longer have to rely on so many axioms. — location: 85
markets are an exemplar of what cannot be contained within axiomatic thought. They are highly complex non-linear systems created by a myriad of half-informed or uninformed decisions made by fallible (human) agents with multiple cognitive biases. — location: 88
In the spirit of John Locke, it is necessary to clear the ground of stones and rubble before anything useful can be either built or planted there. — location: 98
Léon Walras started his career as a physicist, and attempted to extend the axiomatic method into economics. In his Elements d’Economie Politique Pure of 1877, he originated the general equilibrium theory, — location: 102
Supply and demand are virtually never in complete equilibrium. Disequilibria are resolved through price movements. — location: 106
Not the case with regulation.
Sometimes, in the case of excess supply, price movements are not enough to create equilibrium. A stock of surplus inventory is just left unsold. The opportunities to make money in business and in markets lie precisely in the points of disequilibrium. — location: 106
Bachelier’s founding assumption allowed him to apply the traditional laws of probability to price movements, crucially the law of ‘normal distribution’. — location: 111
Fama’s ‘ideal world’ does not exist. Information is only ever partially available and despite the best efforts of regulators to create a level playing field, that information is available in very varying degrees to different participants. — location: 123
The knowledge we have lost in Information
The biggest symptom of the failure of active fund management is the growth in index funds. These have quintupled between 2009 and 2019 and at the time of writing (2020) stand at over $10 trillion. Some would argue that the growth of index funds makes markets more inefficient, as index investing is little more than a version of lagged momentum (index trackers add to shares which have done well and sell shares which have done badly). The alternative argument is that the growth of indexation is coming at the expense of weaker active managers. The best analogy is a poker game where the poorer players lose their money and drop out first. Arguably, that makes the game harder for the more skilled players that remain, not easier. It certainly results in less liquidity and index funds only trade by (quarterly) appointment. — location: 179