Archive for December 7th, 2018

Does better mathematics lead to making more money in financial markets? (remembering Fischer Black as well)..

December 7, 2018

Prof JR Varma of IIMA in this new post reflects on whether better math skills lead to making more money in the markets. The experience is mixed.

The purpose of this blog post is to ask a different question: how common is it for traders make money simply by better knowledge of the mathematics than other participants. My sense is that this is relatively rare; traders usually make money by having a better understanding of the facts.

….

Using unpublished mathematical results to make money often has the effect of destroying the underlying market. Nasdaq (which owned IDCH) delisted the swap futures contract within months of DRW unwinding its profitable trade. Similarly, Fischer Black effectively destroyed the Value Line index contract through his activities. Markets work best when the underlying mathematical knowledge is widely shared. It is very unlikely that the option markets would have grown to their current size and complexity if the option pricing formulas had remained the secret preserve of Ed Thorp. Mathematics is at its best when it is the market that wins and not individual traders.

Prof Varma also looks at whether Black’s math skills helped him win.

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Insights from behavioral economics for India’s policy issues

December 7, 2018

Prof Ashima Goyal of IGIDR in this paper looks at behavioral constraints in policy and behavioral strategies for reform:

A long day of intense and enthusiastic debate among a Panchayat of wise elders has generated valuable insights. One of the learning points repeatedly touched on through the day is the importance of coordination across regulators, government departments and policies. Moreover, Bibek Debroy in his talk extended it to the citizen—how can the citizen help the government achieve its tasks.

Criticisms made, however, point to the question of why policy has not been able to deliver— why is it India has under-performed in so many dimensions? From the macroeconomic perspective, higher growth and some reduction in poverty has been associated with a lot of volatility. Growth has not yet crossed the threshold above which it becomes self-sustaining. Participants of this symposium were long associated with policy. There is an old saying that India has good economists but poor policy. Post liberalization, however, there is more optimism—it is agreed India has excellent potential but the question is when is it going to be realized?

It may be helpful to try a fresh approach. This year the Nobel Prize was given for behavioral economics. It is useful to examine behavioral constraints in policy making, and in achieving the required coordination. First we will apply psychological concepts to understand policy inadequacies, and then go on to see how general reforms or better coordination can be achieved using psychological trigger strategies.

Hmm.

Behavioral constraints:

  • Over-reaction post 2008 crisis leading to high stimulus.
  • Once bitten twice shy: The overreaction led to over cautiousness
  • Wanting to do everything best before growth leads to losses in output.
  • Copying from others like inflation targeting (ouch!) without looking at India specific issues.
  • Interpreting rules too rigidly: Flexible Inflation targeting has become strict inflation targeting. Some discretion is important.
  • Narrow vision where policymakers miss the connections in the economy
  • Excess weight to foreign reputation and external risks
  • Economists in Delhi are more pessimistic than those in Mumbai. (what about other cities?)
  • Do not see any change by focusing on lower growth rates..
  • Optimism and assuming 9% growth is ours..

Likewise there is a list of behavioral strategies for reform.

One may disagree with the arguments posed, but it is nevertheless an interesting and lighter way to assess Indian policy…

Luxembourg set to make all public transport free (and Indian cities barely encourage public transport)…

December 7, 2018

Interesting decision by Luxembourg polity.

From 2019 onwards, the public transport in the country will be completely free. The new government believes this will make people take more of public transport.

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