‘Financial engineering’ –a costly pseudoscientific mistake6 July, 2016 at 16:09 | Posted in Economics | 2 Comments
Note that the economist Robert Lucas dealt a blow to econometrics by arguing that if people were rational then their rationality would cause them to figure out predictable patterns from the past and adapt, so that past information would be completely useless for predicting the future … If rational traders detect a pattern of stocks rising on Mondays, then, immediately such a pattern becomes detectable, it would be ironed out by people buying on Friday in anticipation of such an effect. There is no point searching for patterns
that are available to everyone with a brokerage account; once detected,
they would be ironed out …
You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment … The practice of ‘financial engineering’ came along with massive doses of pseudoscience. Practitioners of these methods measure risks, using the tool of past history as an indication of the future. We will just say at this point that the mere possibility of the distributions not being stationary makes the entire concept seem like a costly (perhaps very costly) mistake.