“If economists are so smart, why aren’t they rich?”

Peter Coy (NYT) considers a few hypotheses.  My take here is pretty simple.  Here are three of the main ways to beat market returns:

1. Build a new product and sell it successfully.

2. Assemble and maintain an especially talented team of quants.  (It is a separate but still relevant question at what scale you can do this and thus how rich you can become.)

3. “See” something about the market, at least for a limited period of time, that other people do not and invest accordingly.  That might be falling interest rates, the rise of consumer tech, or the persistence of low inflation (all until recently!).  Note that #3 requires you to have some money in the first place, and for your run to be long enough that you truly become rich.

Putting aside generic demographic factors, there is no particular reason to expect #1 or #2 to be much correlated with expertise in economics.

You might think that #3 is somewhat correlated with expertise in economics, but I don’t think it is very much.  You can pile up a bunch of ancillary reasons why economists might not be practically oriented enough to succeed at #3.  But even putting all that aside, economic theories of “regime change” just aren’t very good!  (It is comparative statics that we excel at, but that knowledge can be replicated and sold cheaply to the rest of the investment community, if it turns out to be valuable.)  So knowing economics won’t correlate much with success at strategy #3.  And some of those non-economists who succeed at #3 are just lucky anyway.

And that is why, dear reader, most economists are not very rich.  You are correct in downgrading their intelligence for these reasons, though there are still some regards in which they are quite smart, such as having ability at hypothesis testing, or perhaps having the ability to ask very good and penetrating questions about economic issues.

Comments

Respond

Add Comment