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Life is getting ever more volatile – or is it?

We live in an age of unrelenting change. That, at least, is what we are told by a consulting industry that thrives on a gospel of disruption, and journalists who overgeneralise from the earthquake in their own profession.

Anecdotal evidence of volatility is easy to find: the financial crisis; the cultural dominance of inventions such as Facebook (barely a teenager) and the iPhone (younger still); the rise of fringe political parties and a maverick president.

But the statistical evidence for disruption is less compelling. The most straightforward evidence of that is low productivity growth in many advanced economies. If the pace of change is really so frenetic, how come we don’t see it in the productivity statistics?

More here – Tim Harford

Trump, Brexit, and predictions in an age of uncertainty

If 2008 was a sharp reminder that banking matters, then 2016 has reminded us that politics matters too — and, in both cases, the reminder has not been especially welcome. How should economists respond?

Until recently, both banking and politics tended to be something of a niche interest in the economics profession. This isn’t quite as insane as it might seem: if you want to analyse a complex world, you’re going to have to make some simplifying assumptions. For a generation or more, in rich countries, both banks and politicians have seemed complicated and not terribly important, so many economists have ignored them.

Development economists have paid closer attention to politics and have been rewarded for their efforts. Daron Acemoglu won the John Bates Clark Medal in 2005, and the late Elinor Ostrom, a political scientist, won the Nobel Memorial Prize in Economics in 2009. The reason for their interest is obvious: malfunctioning political institutions are a major reason that poor countries are poor.

In the wake of the Brexit vote, Trumpism, the rise of Marine Le Pen and the coming constitutional referendum in Italy, it no longer seems tenable to ignore the economic effects of politics in the western world. But how best to take them into account?

Some economists argue that financial markets are actually an excellent window into politics. For example, Justin Wolfers, an economist at the University of Michigan, tracked US stock futures prices during the first presidential debate. Stocks rose as Hillary Clinton got the better of Donald Trump, and betting markets upgraded the prospect of a Clinton victory. Implicitly, the market was saying that a Trump presidency would knock more than 10 per cent off the profitability of corporate America — and was relieved to see that risk fading.

More here – Tim Harford

What Next For Behavioural Economics?

The past decade has been a triumph for behavioural economics, the fashionable cross-breed of psychology and economics. First there was the award in 2002 of the Nobel Memorial Prize in economics to a psychologist, Daniel Kahneman – the man who did as much as anything to create the field of behavioural economics. Bestselling books were launched, most notably by Kahneman himself (Thinking, Fast and Slow , 2011) and by his friend Richard Thaler, co-author of Nudge (2008). Behavioural economics seems far sexier than the ordinary sort, too: when last year’s Nobel was shared three ways, it was the behavioural economist Robert Shiller who grabbed all the headlines.
Behavioural economics is one of the hottest ideas in public policy. The UK government’s Behavioural Insights Team (BIT) uses the discipline to craft better policies, and in February was part-privatised with a mission to advise governments around the world. The White House announced its own behavioural insights team last summer.

More – Tim Harford – The Undercover Economist

Still Think You Can Beat The Market?

One of the most maligned ideas in economics is the efficient market hypothesis, perhaps because what is actually a rather technical statement about financial market returns is conflated with some entirely different claim about the superiority of free markets over government dirigisme.

The EMH has various forms, but in brief its message is very simple: an individual investor cannot reliably outperform financial markets. The reasoning is equally simple: money doesn’t get left around on the pavement for very long. If it was obvious that the stock market would rise tomorrow, investors would buy shares immediately and the stock market would rise today instead. Anything that could reasonably be anticipated already has been anticipated, and so markets instead respond only to genuinely unexpected news.

But the EMH has a problem: researchers keep discovering predictable patterns in the data, and such patterns amount to big piles of money being left on the sidewalk.The most famous of these is probably the “January effect”: that returns are particularly high in that month. The January effect was originally explained by investors selling shares in December for tax reasons, depressing prices. Whether or not this is true, the EMH says that other investors should stand ready to buy those cheap shares in December, and the January effect should simply not exist.

 

More here……..

Growth or Bust

If there were more corporate collapses, the economy would be a healthier place

Given the collapse of Comet last week, here’s a contrarian claim: far too many companies are staying solvent, avoiding bankruptcy and continuing to trade despite the troubled economy. If only we had a few more corporate collapses, the economy would be a healthier place.

Could this possibly be true? It’s not quite as mad as it might seem. An economy with a vibrant entrepreneurial culture, in which new companies with good ideas find it easy to raise money and reach customers, is also likely to be an economy in which slow-footed incumbents find themselves outcompeted and out of business.

To look at the same problem from a different angle, think about an economy in which banks prop up loss-making companies because of political pressure, or because foreclosure would crystallise a loss at an awkward moment for the bank, while forbearance would postpone the day of reckoning for both borrower and bank.

This is from the blog of Tim Harford and he makes a compelling case.  I would suggest two things. Firstly, the culture of entitlement among both organisations and individuals and there compulsive need for handouts is stifling the economy and individual growth. Show me a billionaire and I will show you someone with their hand out. Secondly, as a trader you dont have this concern – if you go bust you go bust…….

More from Tim Harford here

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