The November 20th edition of The Economist features an observation on the growth of data surrounding purchases of bonds, stocks, derivatives, etc. The article notes that since the founding of the Centre for Research in Security Prices at the University of Chicago in 1960, initially funded by Merrill Lynch, the number of academic economic journals dealing with, analyzing, or providing such data has grown from 80 then to over 800 today.
Yet some economists, such as Robert Shiller of Yale University, according to The Economist, dispute the value of such information, noting that even with all the proliferation of data, no one can explain the market melt-down of two years ago. Others dispute Shiller, pointing out that the market demand for such information proves its value.
In my view, they’re both right, because each is talking about a different aspect of the information. Shiller is talking about understanding how the securities markets actually work, especially in times when markets perform “abnormally,” while all those who want more and more data are talking about how valuable they find it in making money through trading.
Combine all that data with sophisticated trend analysis and you get knowledge that can make a great deal of money, generally always in short-run situations, but what all that data won’t tell you is when something basic is going to change, and change abruptly. And those who mine the data are more than happy to be able to use that data 99% of the time to make piles of money. As for the one percent of the time that they’re wrong… well… everything they’ve made the rest of the time covers that – for them. What their profits don’t do is remedy the vast economic damage that ripples through the economy when one of those unforeseen market meltdowns occurs.
The problem with the computerized use of all this securities market data is that, because it works so well so much of the time for those with the resources to exploit it, there’s little incentive to fund or look into basic research in the field. In addition, the economists who do all the short-term analysis are, according to Professor Shiller, “idiot savants, who get a sense of authority from work that contains lots of data.” Again, the problem is that the focus on daily market economics stresses immediate returns to the detriment of long-term understanding… or wisdom, if you will.
And what else is new?