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xamdam comments on Financial incentives don't get rid of bias? Prize for best answer. - Less Wrong
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I think Vassar made this argument (incentives do not fix bias) based on the assumptions that
The standard response to claims that markets are irrational is 'so why aren't you rich?'. Maybe Vassar is? I think the Efficient Market Hypothesis is flawed but that still doesn't mean that markets are so irrational that you can easily make money by exploiting their irrationality.
This is actually what finance professors say. "Strong EMH" is what you mean by the Efficient Market Hypothesis. "Weak EMH" is the claim that you can't systematically exploit market irrationalities to make money. Weak EMH has actually held up pretty well.
What the weak EMH should say is that "retail investors can't systematically exploit market irrationalities to make money." That definition holds up well, even in the case where the retail investor hands his money to a professional money manager. There are 10s of thousands of professional traders who make their living exploiting market irrationalities. I'm one of them. The weak EMH doesn't apply to us. We are the ones who make sure that it applies to you!
There are people who make money off of, say, arbitrage against foreign currencies. Someone has to be keeping the rates in line when they go off slightly. The problem is that you need huge amounts of capital to do this effectively, so it's limited to institutional investors.
I have a hunch that even the weak version is overstating the case somewhat and that you might even feasibly be able to provide evidence for this by examining the distribution of wealth among investors. This would be difficult due to problems with collecting an appropriate data set, figuring out exactly what distribution the weak EMH should actually predict and what kind of statistical analysis you could use to demonstrate a difference but I suspect one exists.
Essentially my hunch boils down to 'there are more Warren Buffetts and Hugh Hendrys than even the weak EMH would predict'. Most tests of the weak EMH merely purport to show that on average investors don't outperform benchmarks which I think is more or less accurate. I suspect there are more consistent winners (and balancing consistent losers) than it would imply however.
There's a strong case for the weak EMH, in that managed funds consistently underperform index funds. Some managed funds outperform in a given year, but the can't reproduce these results year by year, implying that they just got lucky.
This well known result does not contradict my claim. Neither of the examples of possible consistent market beaters I mentioned run managed mutual funds and I would not expect to find many such people running managed mutual funds. I would expect them to mostly be running hedge funds (like Hendry), investing for themselves or using regular companies as investment vehicles (a la Buffet).
Even with actively managed mutual funds the evidence you present does not directly contradict the possibility of genuinely skilled management. There is strong evidence that actively managed funds do not outperform the market on average and fairly strong evidence that past performance is a weak predictor of future performance (suggesting luck more than skill is the explanation for outperforming benchmarks in most cases) but the data does not rule out true alpha in the tails of the distribution. In fact, I just found that Fama and French are explicit about evidence for this existing:
and/or that they use bad incentives. public held corporations usually get outperformed by family owned entities due to better long term planability. Even Managers optimize for whatever they get payed by.
Really? Robin linked to a paper suggesting that firms floated on the stock markets have better management than family-owned firms.
As I recall, Robin also linked to a paper pointing out that very large companies underperform. Family-owned firms tend to not become that large; I wonder if that undoes the going public effect.
We may be running into problems with the ambiguity of 'outperform'; clearly dis-economies of scale aren't going to allow family run firms to become larger than public ones, for example.
Bitterness doesn't help anything. If publically declaring yourself wanting to save mankind and looking for support doesn't work, pivot and find some other way to achieve your goals.
If the problem is that people can't process the complex chain of logic necessary to understand existential risk, work on IA. Start on working on fixing certain types of brain disease that you think might be beneficial for the rest of humanity as well. For example my brain feels tired after certain activities, and I don't like to think. Why? Is it because I have depleted some nutrient in my brain chemistry? Can this be regulated in some fashion. This must be a chronic problem for some people, so you might be able to get funding.
Or in other words don't go on this path..
Did my response look like that? I was trying to convey the idea that you can use existing factors in society to achieve the goals you want, even if humanity doesn't care about the goals. In the first case it was leveraging disease prevention and then relying on the use of medical technology for self-enhancement that has happened previously (which I elided).
The benefits of following that path is determined by how much you think that people not being interested in existential risk reduction is due to their brains shutting down when people talk to them about it and how much you think it is due to conflicts with their other interests. I'd guess a little of both, but probably more interests. That we have lots of smart people here, suggests that there is something in humanity that can become interested in existential risk reduction given sufficient brain power. So I wouldn't expect a vast awakening, but I think it would help the cause.
To give another example of how you might achieve your goals even if society doesn't share them. Take aging, if Aubrey de Grey could get some of his proposed techniques to work on just the skin of humans and actually keep skin healthy and young (even while we degrade on the inside), he would get mountains of cash from the many women who want to keep looking young. Admittedly he couldn't muck around with marrow and things (I forget his exact plans), but he should be able to do better than the current "anti-aging creams". Then he needs to find another group of people that want to keep their muscles young (men?). And do it piecemeal.
At no point relying on people wanting to live forever. Think sneakier :)
Negative emotions are to me a warning sign, not to avoid some truth, but to uncover some falsehood.
That was really well stated.
Yes, but "humanity cares about its own future" is such a vague statement that you can accurately believe it either way, depending on how you interpret it. So I don't see anything wrong with interpreting it so as to be less bitter.
Right, and my position is the strong pro-contrarian hypothesis. There are visibly countless opportunities for extremely but boundedly irrational individuals to benefit from solving commons problems, therefore almost no-one is extremely irrational but boundedly so for an extremely permissive bound, almost everyone is even more irrational than that.
One of my best data-points is that so few people did the obvious and invested in Buffett once he had the best track-record of any other investor 35 years ago. With some leverage, any such people who started out with reasonable investments could be billionaires today, and if many existed he would have been swamped with funds and unable to continue to overperform. Why would rational people who give their money to a money manager give it to one who didn't have the best or almost the best track record. Yes there are reasons, but not plausibly for the number of people who didn't buy Berkshire.
Do you have any theories about why so many people didn't invest in Buffett?
Any chance that if Buffett had been swamped with money, he would have rethought his strategy and come up with something useful for the changed circumstances?
The standard response to that is "the market can stay irrational for longer than you can stay solvent."
also, in my case
What historical rate of return on investment = rich?
It's a nice line but I think if being more 'rational' than the market causes you to lose all your money then you're doing 'rational' wrong. Rationality is supposed to be about winning, not about being 'right' but broke.
Consistently displaying positive alpha over 5+ years would be indicative of some genuine investment skill. Some top hedge fund managers seem to be able to do this but it is a pretty rare level of talent.
12+% with lowish volatility for 5 years would be impressive, especially if it's compounded.
That's why I mentioned all the assumptions ;)
In practice, just no.
Just no to
If yes, please provide support.