= 27d567bc2d48d9f40e9ccc20ea370b15)
A's utility function also needs to be specified. How many utils is the first box worth? What's the penalty for additional boxes?
The claim that the market is good at predicting future earnings.
This is conceptually very easy to test; get historical stock price and earnings data, compute P/E ratios at each snapshot, compute earnings growth across snapshots, and then look at the relationship between the two. Vanguard ran the numbers here (page 7), and two ways of calculating the P/E ratio were the strongest two factors. (As one would expect, 1-year returns were very difficult to predict at all, and they were mostly useful for 10-year returns.)
That's very useful info. Thanks for the link.
Do you want a citation for that P/E ratios reflect market expectations about future value (and thus earnings), or do you want a citation for the claim that the market is good at predicting what earnings will be in the future?
The claim that the market is good at predicting future earnings.
It probably is, but economics does not yet have the empirical grounding to give me high confidence in its theories (the way I would be for fields like physics or chemistry; I still think economic theory has a strongly positive correlation with reality).
I'm not sure about China as it might be too corrupt for passive investing to work.
That's an interesting offhand comment. Does that imply that EMH doesn't apply to financial assets in corrupt economies, specifically to external (foreign) investors who can come and leave as they want?
Also, while China's official economic numbers are highly suspect (see e.g. this), it looks very likely that it is one of the three world's biggest economies (along with USA and EU). Can a passive investor afford to ignore it?
To help mitigate the currency risk of investments?
Well, it doesn't mitigate the risk, it just partially avoids it. You are right in that investing in foreign countries brings with it FX risk and while it's easy to hedge a lot of people are not going to bother.
Another interesting thing here is that the currency markets do not fall under EMH, both empirically (they are clearly not a random walk) and theoretically (the preconditions for EMH do not hold).
Another interesting thing here is that the currency markets do not fall under EMH, both empirically (they are clearly not a random walk) and theoretically (the preconditions for EMH do not hold).
Can you please elaborate on that? Do you mean the prices themselves are not a random walk or do you mean the prices are not a random walk after adjusting for interest rate differences?
And what preconditions don't hold for currency markets?
Yes, look at the ratio of a stock's price to it's current earnings to get a good prediction of how the company's earnings will change over the next decade.
Citation needed.
In response to
Rationality Quotes Thread September 2015
In 1736 I lost one of my sons, a fine boy of four years old, by the small-pox, taken in the common way. I long regretted bitterly, and still regret that I had not given it to him by inoculation. This I mention for the sake of parents who omit that operation, on the supposition that they should never forgive themselves if a child died under it; my example showing that the regret may be the same either way, and that, therefore, the safer should be chosen.
Ben Franklin
In response to
Open Thread August 31 - September 6
Anyone ever try modeling internal monologue as political parties? I suppose it's not so different from the House voices in HPMOR, but I'm curious if there's RL experience.
In the US at least, where the system it set up such that there can only be two parties that matter, I think the parties are too much of a "big tent" hodgepodge for that to work. Perhaps it would if they were based on the parties in a country where they have more of an incentive to be based around a consistent world view.
Any Germans want to weigh in?
In response to
Group Rationality Diary, August 30 - September 12
My wife and I recently started using Habitica (formerly called HabitRPG). The extent to which each of us is engaging in good habits and doing tasks we plan on doing is now visible to each other in the form of character levels and hit points (but the specific items are not). This makes it possible for us to hold each other accountable for improving ourselves without having to nag.
Overall I've gone from making good use of ~10% of my free time to making good use of ~30%. I've still got quite a ways to go, but this is significant progress.
It seems that being extroverted is mostly about simply building certain extroverted habits. I’ve just noticed that I should probably try and replace my default response to “How are you?”/”What’s up?” with something with hooks for interesting topics, or maybe just saying whatever’s on my mind at the moment.
It occurs to me that certain situations and topics constantly reoccur, and that these present useful opportunities to transition to a more mutually interesting topic. For example, I should probably condition my response to mentioning the weather into “honestly, I think I probably follow weather satellites more closely than the weather itself”. This might easily lead to discussions of space, technology, or even GCR/X-risk hooks like the 2013 Chelyabinsk meteor or the Solar Storm of 1859.
At the moment, the best I can come up with for discussing sports is to bring up the idea that anyone sufficiently obsessed with anything, regardless of topic, basically slowly becomes a nerd. Sports nerds start out as just fans, but once they start tracking stats and playing fantasy football, they slowly turn into nerds. They are especially amusing because of the “jocks vs nerds” archetype, which is a completely arbitrary dichotomy. I can imagine this leading to discussions of in-groups, sociology/psychology, or maybe meta-analysis.
Moving from small talk to more interesting topics is a totally different skill set than general extroversion.
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