Imagine you run this little test, adapted from Nicholas Taleb's The Black Swan (see book recommendation on the right):
On one side is Ben, a wing-tipped bearded ex-professor of economics who now works at the Fed. He became famous because of his precise econometric modeling of the Great Depression.On the other is Moe, a wizened veteran of Wall Street who has been bloodied in many a battle with sharpies, conmen, penny stock pushers and assorted manipulators. He is not famous and doesn't want to be. But he is quite rich.
You hold up a pair of dice and assure Ben and Moe that they are not loaded. You then start throwing the dice and after twenty consecutive throws of snake-eyes you ask both of them what's the most probable outcome of the next throw. Ben, being who he is, naturally says "seven". Moe laughs and says "snake-eyes". Ben protests that he was assured the dice were not loaded. Hearing this, Moe laughs even harder and calls Ben a schmuck. Who do you want as an investment adviser?
The moral of the story is, if you expect the economy to respond strongly to deep interest rate cuts - like it did so many times before - you better check beforehand that this time the game hasn't been "loaded".
You hold up a pair of dice and assure Ben and Moe that they are not loaded. You then start throwing the dice and after twenty consecutive throws of snake-eyes you ask both of them what's the most probable outcome of the next throw. Ben, being who he is, naturally says "seven". Moe laughs and says "snake-eyes". Ben protests that he was assured the dice were not loaded. Hearing this, Moe laughs even harder and calls Ben a schmuck. Who do you want as an investment adviser?
The moral of the story is, if you expect the economy to respond strongly to deep interest rate cuts - like it did so many times before - you better check beforehand that this time the game hasn't been "loaded".
Re: The moral of the story.
ReplyDeleteHmm. That's a curious statement to make. I'm trying to figure out how that translates to real life. It's not that I would question the interpretation (I might even be inclined to agree with you), but I am just wondering what that enigmatic story means.
Who would I want as an investment adviser? Even if Ben is wrong, I certainly wouldn't want Moe (who relies on loaded dice) to be my investment adviser. Because soon enough they will load the dice against me, too. In that case, it may just be better to stay out of the game altogether.
Okie,
ReplyDeleteThe moral is (I think) not that Moe has personally rigged the game; rather he recognizes a rigged game when he sees one. Even after 20 snake-eyes in a row, Bernanke naively believes in an efficient market governed by the laws of probability rather than a rigged market hopeless skewed by avarice and greed.
My money is on (and with) Moe.
Cheers!
Second vote for Moe.
ReplyDeleteMoe^3
ReplyDeleteOne of the two is a Mo(e)ron and the other's just Moe. A long while ago, on my blog, I offered that Ben Bernanke and The Fed would do exactly what he they are doing because it was the only thing he and they could do.
ReplyDeleteI amend that statement now by saying he is doing what he is programmed to do, namely use the utterly outdated and now disastrous Greenspan approach.
Mr. Fed Chairman: Here's what you must do immediately.
REVERSE COURSE!!! RAISE RATES. THAT'S RIGHT, RAISE THEM! THIS WILL HAVE THE OPPOSITE EFFECT ON THE LONG BOND THAT YOUR DISASTROUS PANIC EASINGS HAVE HAD TO DATE. THE BANKS ARE INSOLVENT. RAISING RATES WILL ACCELERATE THE INEVITABLE BANKING COLLAPSE.
YOU CAN BE HISTORY'S HERO OR ITS GOAT! WHICH WILL IT BE?
Moe^4
ReplyDeleteThe dice were loaded by the person doing the test; it is all about assumptions vs. evidence.
ReplyDeleteRegards
They're Ben's dice.
ReplyDeleteYes, they're Ben's dice. Which makes him twice as stupid to not realize that someone swapped out the good ones and replaced them with the loaded pair.
ReplyDeletetibia money tibia gold tibia item runescape accounts buy runescape accounts runescape money runescape gold runescape gp runescape power leveling runescape powerleveling cheap rs2 powerleveling runescape equipment buy rs equipment runescape runes cheap rs2 runes runescape logs cheap rs2 logs runescape items buy runescape items runescape quest point rs2 quest point cheap runescape questpoint runescape gold runescape items runescape power leveling runescape money runescape gold buy runescape gold buy runescape money runescape items runescape accounts runescape gp runescape accounts runescape money runescape power leveling runescape powerleveling tibia gold dofus kamas buy dofus kamas wow power leveling wow powerleveling runescape questpoint rs2 questpoint Warcraft PowerLeveling Warcraft Power Leveling World of Warcraft PowerLeveling World of Warcraft Power Leveling Hellgate money Hellgate gold buy runescape logs buy rs2 items cheap runescape items Hellgate London gold Guild Wars Gold buy Guild Wars Gold runescape items rs2 accounts cheap rs2 equipments lotro gold buy lotro gold buy runescape money buy runescape gold buy runescape runes lotro gold buy lotro gold runescape money runescape gold cheap rs2 powerleveling eve isk eve online isk buy runescape power leveling rs2 power leveling tibia gold tibia item runescape accounts Fiesta Silver Fiesta Gold SilkRoad Gold buy SilkRoad Gold Scions of Fate Gold Hellgate Palladium Hellgate London Palladium SOF Gold Age Of Conan Gold AOC Gold ArchLord gold tibia money tibia gold runescape accounts runescape gold cheap rs2 powerleveling buy ArchLord gold DDO Plat Dungeons and Dragons Online Plat
ReplyDelete