New MRU Course: Money Skills!

We have a new course at Marginal Revolution UniversityMoney Skills. The first set of videos overlap with our Principles of Macroeconomics course and cover things like lessons from economics for investing in the stock market. We also cover this important material in our textbook, Modern Principles. Later videos will cover time discounting (mortgages), career choice, renting versus owning and other topics depending on demand.

Here’s our first video, How Expert Are Expert Stock Pickers? Later in the week, Tyler will cover the theory of efficient markets.


I will be the first to comment. Harumba the gorilla formerly of the Cincinnati zoo will get 2% of the presidential vote say some polls.

A very basic video. Buffett's orangutan coin-flippers is used to illustrate 'luck in the market' but Buffett himself is the exception to this rule. So the market is not random. However, for most people without legal or illegal inside information, most people cannot replicate Buffett. AlexT concedes this indirectly. AlexT disses Buffett's recent performance (he's bet big on railroads, IBM recently). Also not mentioned is that during recessions human stock pickers do outperform passive indexes (but recessions are rare). Finally the theoretical ground that if everybody picked a passive fund then there might be error due to no active investors doing valuable arbitrage (we're a long ways from that at the moment)

Buy low. Sell high. It's not what you buy, it's what you pay. Since 2009, if you bought on dips and sold on short term upswings, you did really well. The problem is which dip will be the next, proverbial "falling knife?" Don't try to catch it.

Buffett ("I pay less Federal income tax than my secretary.") adeptly plays the corrupt, incompetent political system. Seen at Instapundit: "Clinton’s economic plans likely to boost her corporate donors. . . . Your would-be feudal lords are dispensing bounty to those who swear fealty to them."

It's why Trump received $19,000 from Wall Street firms and interests and Hillary raked in $50,000,000, plus huge speaking fees.
The Federal Reserve Act of 1913 and later revisions were meant to minimize business cycle/financial panics. Since 1913, recessions have not been as rare as advertised, just my opinion.

Well, obviously. But nobody can predict when the upswing or the dip is going to end.

More than one I have bought on a dip only to find out that I actually bought on the slight downtick just prior to the total crash. Or some on an uptick and then watched the stock soar.

I mean, I bought Netflix in 2007 at $20 a share and sold it at $25. I'm still beating myself up for that one.

it's at $95 now but there was a 7 to 1 split last year, so I basically missed out on 2800% profits. And I KNEW they would own the online streaming market. I fucking knew it, I just got impatient and didn't want ot sit on my money for the long haul.

I've done that more than I care to remember.

Actually, while Buffet certainly seems to use the rules very effectively in his tax management, the main thing to note about this is that he knows it's unfair, and speaks openly about it.

I'm waiting for your course "How expert are Fed monetary policy experts?"

I will suggest there are two ways to view this phenomenon: (1) America's financial market includes so many valuable companies that it's better to invest in as many as possible and not focus on a few which might suffer unexpected losses, and (2) the financial market is primarily a speculative market in which investors pick and choose not based on fundamentals (like earnings) but momentum resulting from the hype (going up) and fear (going down) fed by bankers and other large investors who mimic one another. Of course, we would prefer that (1) is correct, but we suspect that (2) is correct. A monkey is an appropriate symbol since the monkey is known for its ability to mimic what she sees.

I know I am like a broken record, in this instance once again alluding to Rene Girard's mimetic theory. But ever since I read that Peter Thiel is a student of Girard (, I see imitation in every human behavior, including investing.

OK. So pick a lot of companies to lower risk. Do you want the top half or bottom half of performers?

"Diversify" is useful advice, but not really that useful unless paired with additional expertise.

My advice for the upcoming EMH video is like the "cowbell" sketch, but for "cowbell" substitute "Chiller."

What! Shiller was spell corrected to Chiller. Stupid new free LG X8.3 Android tab.

Dr. Tabarrok,
Can you hook up these dots?
Warren Buffett is not a genius investor. Owning 400,000,000 shares of Coke stock (at some point) is not genius because:
If your culture's relationship with the sky and ocean are deadly, your cultural genome sucks.
See Dr. T: if your culture's converting sky and ocean into terrorists, arming them with weapons of mass destruction that will bring a "premature and perverted death" to your descendants, your culture's manner of relationship / reality interface needs an overhaul at a fundamental level.
Here's a map-in-motion re the future investment other species are committed to given the current state of reality:
Verily, their response ability exceeds your dinosaurian economics dept. (But then they use genetic code for reality interface; and genetic code > monetary code, in part because G-code's been on the selection block a tad -- billions of years -- longer.)
“The story of human intelligence starts with a universe that is capable of encoding information.” Ray Kurzweil – "How to Create a Mind"
It's literally deadly that you and your profession don't understand code, including monetary code, in a physics / evolution / complexity context.
Given that human knowledge doubles roughly every 13 months, and that myriad additional inputs into geo eco bio cultural & tech networks generate exponentially accelerating sets of new relationships, i.e., new and unprecedentedly complex environs for us to navigate / process, I respond thusly:
I'm not saying I'm right; I'm saying I'm less wrong than you.
The Price Is Wrong:

"The story of human intelligence starts with a universe that is capable of encoding information.” Ray Kurzweil" Does the story need to end in a university?

Sounds like you have even more faith in abstract mathematics than many economists. The maths of the physics are not well-suited to the maths of the economy, because they are very different things. Perhaps an entire century of misunderstanding on the mathematical nature of equilibrium in an economy resulted from this misunderstanding, originating with Walras.

But ... maybe you're onto something. Just not quite sure what.

Can someone recap this in non-video form? Cause I don't want to be playing anything with sound while at work.

I'm going to assume the gist of it is the usual message that gorrillas pick stocks just as well as the best humans, unless it's the "counter-intuitive" message that they actually are better and the conventional wisdom is a myth.

You can turn off sound and turn on CC.

But it is pretty much from monkeys to index funds based on performance, and lower returns to active managers. Perfectly fine.

The problem I have with the notion that you should just invest in a passive index fund is that I feel like that's the same sort of thinking that created the housing bubble. If everyone just mindlessly invests in the same things, believing that it's a safe bet, then that thing is *guarenteed* to have some sort of bubble. (Because that's what bubbles are made of - mindless herd thinking).
I suspect what you will end up with is some sort of corruption in the fund selection process. Companies that are in the index will have inflated stock values disconnected from performance (sort of the way the MBS's ratings were all AAA even when they were made up of sub-prime ARMs). Which means that *at some point* there will be a crash, and the indexes and the index funds with them will collapse.
I want an actively managed fund because I don't want to trust my portfolio to a monkey or a blind algorithm that's going to be asleep at the switch when the shit hits the fan.

If everyone holds target retirement funds, with lifecycle only shifts from growth to income, no problem.

How many actually panic sell retirement funds? We hear about a few, but probably a small minority. The status quo bias works in investors favor in this situation.

The lack of panic selling isn't a solution to the problem of herd bias in favor of indexed companies.
If people are mindlessly investing in indexes, then at some point, those indexes WILL become disconnected from reality. Ray Lopez had a better answer above. Still, efficient market hypothesis didn't help people doing arbitrage on MBSes until the actual crash started. The correction has to actually happen during the time frame of your investment horizon.

Its ok, the news processing trading bots will inject performance discrimination.

Bots are GIGO. A human has to write the code. A human makes assumptions when programming the bots.
Maybe if you had some sort of machine learning algorithm datamining the stock market in real time and adaptively learning to exploit patterns that no human can see.
But you still have the problem that humans decide what companies are included in the indexes. How do you stop that from being gamed?

AI hedge funds are a happening thing. Any supporter of driverless cars should be on it.

(investment is probably a softer problem, if only because average results matter more than 100% safety.)

A TED on why trading might be the easier problem

hazel I think there a couple of sensible objections to the good point you raise:

1. at this point passive funds are still the minority
2. the point of passive ownership is that stocks are a good asset class and should form part of any portfolio - simply you're collecting dividends from companies that are producing profits. over the long term, shares have always been a good bet - you'd have made good money buying the day before the 1987 crash. by owning more shares across a larger portfolio - e.g. the whole S&P 500, you decrease the risk that you're holding a stock that is mispriced against you (and so loses money) - the portfolio effect. actively managing the portfolio isn't obviously a good thing to do.
3. there will always be some element of active trading, at the very least by insiders or those closer to them
4. a point skimmed by alex t, that even if active managers can manage better the issue is the fees they charge which exceed the value they add and finally

5. you can always engage directly if you see the market doing something silly

(you'd have made good money buying and HOLDING shares the day before the 1987 crash. the point is to get in the market and leave your holdings alone, they'll go up and down sure, but you'll be OK in the long term).

Risks will definitely get very systemic if too many people are in passive index funds, because risks will accumulate over time with little attention, and most likely the analytical tools to say "GET OUT!" will be too similar (so, potential meltdown).

what percent of people know what a newspaper stock page is ?
The explanation of what a mutual fund is flew by way way to fast for most people

why not start with the take home: invest in low cost index funds, for examnple (name of fund, why it is an index, why low cost) avoid specialized ETFs and funds that claim to be index

Keep watching over the next several weeks!

Berk and Green 2004 is such a milestone in brilliant yet simple economic thought, and its generally true when you dig down to how the industry works. The things that people point to suggesting that managers don't have skill are actually empirical facts in a world where managers DO have skill. The gains from skill end up going to the managers instead of the investors. All you require is a diminishing return to skill and closet indexing.

While this kind of video makes people think carefully about probability, it makes me uneasy that it seems to ignore the ideas behind this important research in favor of the ideas that prevailed before it.

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