Economists #2


Economists know more about how the fragments of society work than anyone. In school they are taught to break down the economy into its tiniest parts and to quantify each minutiae so it can become part of a formula. Once done those econometric formulas should become a viable equation to predict how the total economy will react when a change occurs to any part of the formula.

Since economists know all this I must ask if these formulas are so good at predicting the economy why aren't all economists rich?

They aren't. And I will give you some clues why.

The more complicated a formula the less likely it is to work. When the economy is not reacting the way an economist thinks it should based on his formula he will tell you that one part of his equation is not acting "normally", whatever that is. Another thing you will find is there is no Holy Grail formula. Each one of these PhDs has tweaked the basic one and either added or subtracted parts or maybe changed the weighting of certain parts. If you ask 1,000 economists for an answer to what will happen and why you will receive 1,000 different reasons. That doesn't mean they are all wrong. It does mean there is no one right way to arrive at a correct prediction. The law of averages will have many with a valid answer even if their reasoning is wrong. Sometimes pure luck is enough.

When I was a floor trader there were a thousand guys trading and each one had a different method to determine if the market was going up or down. One wanted to buy. Another thought the market was headed lower and wanted to sell. At that moment you realize that there is a 50/50 chance one of them is correct. Every time an economist makes a prediction you and I could be a winner or loser.

There are some very smart economists. Not too many. Once in a while one of the young ones come up with an idea that all the others eventually adopt such as the Laffer Curve which we will not explore here. Until an economist has gone through a major bull and bear market cycle you would not want to live or die with his predictions.

Copyright 2005


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