Five Things You Need to Know: Living Large in Austria, Fun With Fractals, Not So Linear, The Herd Drives ALL, Required Reading
Everything is psychology. So figure out psychology and all the others follow.
Editor's Note: While we congregate in Vail for Minyans in The Mountains 3, we asked each Professor to prepare some thoughts on fiscal literacy, how to listen to the market and their area of expertise.
1) The Keynesian and Monetarist schools of economic theory are just plain wrong and lead to inefficiency, capital waste, destruction of freedom, and boom-bust cycles that benefit the few at the expense of the many. The Austrian school, by contrast, is more fair, much more beneficial to freedom and ultimately the best theoretical foundation for the largest mean increases in standards of living.
2) Markets are complex adaptive (emergent) systems whose price history exhibits robust fractal patterns that have definite (as opposed to indefinite) fingerprints. Largely irrational individual agents collectively reach optimized goals of capital allocation without any central controlling authority whatsoever.
3) The price return history of stocks are non-gaussian, which is to say they are leptokurtic, have fatter tails, and returns more positively than negatively. All of these statistically proven characteristics are proof that markets do not follow a linear, rational, efficient markets path. Stocks are non-linear, non-gaussian, and exhibit power law characteristics that make market timing possible.
4) A global, unconscious, irrational herding behavior, alternatively and cyclically toward and away from risk, is what drives ALL economic activity: from buying foodstuffs and stocks; to voting patterns and election outcomes; to trends in art, music, and movies; to war and peace. The best (robust and coincident) yardstick for measuring the flux of this global unconscious herding behavior toward risk seeking or risk averting behavior is stock price behavior.
5) Read: Benoit Mandelbrot, Amos Tversky, Dan Kahneman, Colin Camerer, Didier Sornette, Mike Mauboussin, Nassim Taleb, Tom DeMark, George Loewenstein, Bob Prechter, Ilya Prigogine, William Poundstone, Edgar Peters, Richard H. Thaler, Robert Axelrod, Kevin McCabe, J Doyne Farmer, Scott Camazine, Robert Shiller, John Casti, Paul Zak, Murray Rothbard, Hans-Hermann Hoppe, Ludwig Von Mises, George Soros.
- Fundamentals are psychology. Macroeconomics is psychology. Technicals are psychology. Everything is psychology. So figure out psychology and all the others follow.
- In group settings, the limbic system trumps the cortex every time. Every time.
- When faced with 100 or more independent investment decisions, how does one allocate capital most efficiently among those individual bets to maximize long term capital appreciation? Claude Shannon and John Kelly came up with the answer.
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