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DanielLC comments on Rationality Quotes June 2014 - Less Wrong
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Because when it's easy to outguess the market, the people who are good at it get richer and invest more money in it until it gets hard again.
It's not in perfect equilibrium constantly. I've heard of someone working out some new method that made it easy which took off over the course of a few years until enough people used it that outguessing the market was hard again.
This is an extremely impoverished framework for thinking about financial markets.
Let's introduce uncertainty. Can Alice outguess the market? Um, I don't know. And you don't know. And Alice doesn't know. All people involved can have opinions and guesses, but no one knows.
Okay then, so let's move into the realm of random variables and probability distributions. Say, Alice has come up with strategy Z. What's the expected return of implementing strategy Z? Well, it's a probability distribution conditional on great many things. We have to make estimates, likely not very precise estimates.
Alice, of course, can empirically test her strategy Z. But there is a catch -- testing strategies can be costly. It can be costly in terms of real money, opportunity costs, time, etc.
Moreover, the world is not stationary so even if strategy Z made money this year whether it will make money next year is still a random variable, the distribution parameters of which you can estimate only so well.
It's good enough.
Knowing about things like risk will tell you about the costs and benefits with higher precision. It will explain somewhat why there's lots of people involved in a market, and not just a couple of people that control the entire thing and work out the prices using other methods.
All that uncertainty makes the market difficult to predict. But all you really need to know is that regardless of how easy or hard it is to guess how a business will do, the market will ensure that you're competing with other people who are really good at that sort of thing, and outguessing them is hard.
No, I don't think so.
This can be applied to anything from looking for a job to dating.
So, no, that's not all you really need to know.
You wouldn't expect to be able to do job X better than a professional if you don't have any training, would you?
Also, economists say the same about the job market. If you don't have any particular advantage for any given job, you can't easily beat the market and make more money by picking a high-paying job. If a job made more money without some kind of cost attached, people would keep going into it until it stops working.
I guess there is more to the market. It's something that scales well, so doing it on a small scale is especially bad. It takes exactly as much work to by $100 in stocks as $10,000. If you're dealing with tiny companies where someone trying to make trades on that scale would mess around with the price of the stock, that won't apply, but in general trying to make money on small investments would be like playing poker against someone who normally plays high stakes. They're the ones good enough to make huge amounts of money. The market won't support many of them, so they must be good.
I have a weird feeling that a bunch of people on LW have decided that there's nothing to be done in financial markets (except invest in index funds), fully committed to this belief, and actively resist any attempts to think about it... :-/
Isn't this optimal? The case for index funds by ordinary investors is extremely strong, and if there exists good evidence to the contrary it will be of the form that is almost certainly beyond the ability of most LW people to properly evaluate.
Is it? Which specific index funds are you talking about and how do you define optimality here?
So, it's completely fine for most LW people to evaluate the chances of a Singularity, details of AI design, or the MWI of quantum mechanics, but real-life financial markets, noooo, they are way too complicated? X-D
Low cost, broad based index funds.
Good reply, but there are different types of complexity and looking at financial market data isn't a type of complexity LW tends to deal with.
That's still very VERY non-specific.
Let's take our friends Alice and Bob. They come to you and ask you where should they invest their pennies. You tell them "low cost broad based index funds". They blink at you and say "Could you please give us the names of the funds?"
And I still have no idea what do you mean by "optimal".
That is true as a matter of empirical observation. But the real question is about capability: can LW types deal with the financial-markets type of complexity? Why or why not?
I tend to think that the current markets are efficient enough that putting my money in index funds is about the best I can do from a time/opportunity cost perspective.
The professionals I know working for hedge funds do routinely find small inefficiencies, but in order to make them profitable enough to be worth the time investment, they generally have to exploit quantities of leverage I don't have access to as an individual.
If you enjoy pouring over the market looking for details to exploit, then it can be a use of leisure time I guess. I pour over enough data at work that spending free time pouring over more in order to achieve fairly small gain just doesn't seem worth it.