tag:blogger.com,1999:blog-7905515.post4721371941024489033..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: A Batesian Mimicry Explanation of Business CyclesEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-7905515.post-32984050377822063222010-08-02T18:08:33.253-05:002010-08-02T18:08:33.253-05:00Warren Buffet has a pithy relevant quote: "Ev...Warren Buffet has a pithy relevant quote: "Every cycle has three "I's" - first come the innovators, then the imitators, then the idiots."Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-18233554499850776842010-07-28T21:45:45.837-05:002010-07-28T21:45:45.837-05:00Eric,
Do you think it might be possible to reduce...Eric,<br /><br />Do you think it might be possible to reduce the odds in differentiating between viable business and doomed mimics by studying the lag times between when a sector attracts significant investment interest and when mimics start appearing in force? I.e., might there be a sweet spot in investing in newly hot sectors -- late enough so that it looks like companies in it are getting traction, but early enough that the sector hasn't been saturated by mimics yet? <br /><br />Also, minor typo: You spelled "advertising" with a "z" instead of an "s" in the AllAdvantage paragraph. <br /><br />Fascinating post, btw.Davehttp://steamcatapult.com/noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-65459382990063620182010-07-28T13:42:35.550-05:002010-07-28T13:42:35.550-05:00Robert: Clearly some did note the flawed signals, ...Robert: Clearly some did note the flawed signals, and made a lot of money shorting or avoiding internet or housing stocks, but they suffered a large drawdown waiting for the right time. My innovation here is to note that an otherwise innocuous error is magnified via supply effects by mimics, and this really amplifies the cycle. Further, the error centers on something that conventional wisdom finds safe, as opposed to being centered on assets with high amounts of 'roundaboutness' or duration. It's irrational primarily with hindsight.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-73170708683672231492010-07-28T11:34:28.833-05:002010-07-28T11:34:28.833-05:00Seems like the problem is believing that quality &...Seems like the problem is believing that quality 'markers' are a good substitute for actually understanding what you're investing in. That's irrationality all over again. Shouldn't genuinely high quality investments become undervalued in a market where many low-quality investments are successfully masquerading as high quality? Shouldn't there be a lot of money to be made by those who know how to understand real quality? Maybe nobody can tell the shams from the high quality investments at the time...but I doubt that.Anonymoushttps://www.blogger.com/profile/05431036725490947171noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-63912595506414446952010-07-27T23:06:18.881-05:002010-07-27T23:06:18.881-05:00Your "what got published" link is broken...Your "what got published" link is broken.TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-76591414604361821912010-07-27T19:51:26.787-05:002010-07-27T19:51:26.787-05:00I remember in 1998 or so getting paid to click lin...I remember in 1998 or so getting paid to click links using the website "FreeRide" (http://web.archive.org/web/19981212025059/http://www.freeride.com/)<br /><br />I wasn't even a robot and I remember it being worth my while (~$30/hr at first).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-40303650956894477872010-07-27T19:28:52.345-05:002010-07-27T19:28:52.345-05:00Interesting post, but it reminded me of Bell's...Interesting post, but it reminded me of Bell's theorem a bit. You have an assumption that the mimic and the model are "known" beforehand, as with local variables.<br /><br />But with new technologies, what works as a business model isn't known. Maybe all entrepeneurs are overconfident, but which ones are discovering a profitable niche?<br /><br />Also consider network effects, which mean that the classification of model and mimic can be unstable. Take the internet bubble- it wasn't at all clear who would be making the money, would it be online portals (like a TV channel), or megawarehouses like amazon (sort of a big box model). I don't think it was clear ten years ago that the Google model was the "model" and not a mimic. And if Google hadn't succeeded it getting all the search engine traffic, it may have ended up being more of a mimic.Recovering Bankerhttps://www.blogger.com/profile/16466945084301269135noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-84443355902356871952010-07-27T17:10:03.244-05:002010-07-27T17:10:03.244-05:00Brilliant post, although the last graf ("robu...Brilliant post, although the last graf ("robustness...") does give it a faint odor of N_____ T____.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-75794051777867484022010-07-27T13:01:10.235-05:002010-07-27T13:01:10.235-05:00anon: my link to Moody's references a post I d...anon: my link to Moody's references a post I did quoting a Moody's source that they took collateral as a given,<br /><br />http://falkenblog.blogspot.com/2008/04/lowenstein-on-moodys.htmlEric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-61754505185524468862010-07-27T12:45:09.799-05:002010-07-27T12:45:09.799-05:00Good stuff, I like the biological ideas brought in...Good stuff, I like the biological ideas brought into an economic context. WRT the econ lit <a href="http://www.umass.edu/preferen/gintis/General%20Equilibrium.pdf" rel="nofollow">Gintis has a model</a> of mimicry to investigate the dynamics of general equilibrium. He finds that mimicry can lead to large deviations from equilibrium even with no global shock.<br /><br />Also your link to the discrimination in the housing market goes back to your homepage. I don't think that is what you trying to do.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-91229979753849935272010-07-27T12:08:04.966-05:002010-07-27T12:08:04.966-05:00I agree with the basic idea put forth, that invest...I agree with the basic idea put forth, that investment opportunities will feed on themselves and attract the sort of "investors" trying to ride the bandwagon, so to speak. However, there is an important epistemological and monetary point that needs to be made clear. <br /><br />First, booms and busts are unavoidable in new industries or areas. Historical examples in railroads, airlines, telecom, computers illustrate the main point -- when these new fields develop no one knows how big they should actually be, how much capital should be invested, etc. Setting aside credit induced expansions, these booms are a process of discovery and the "mimic" idea probably explains why they tend to overshoot on invested capital leading to the bust phase.<br /><br />The key monetary point is that without arbitrary credit creation such sector or localized booms would not grow into giant economy-wide frenzy that devastate the economy when they crash. The limit is in the real capital available, in that without arbitrary credit creation the boom can only continue if it is able to profitably draw capital out of other investment areas. The main point here is that any process of investment is a process of dis-investment from other areas (assuming no credit expansion) which makes the decapitalized areas more profitable. <br /><br />tl;dr: It is credit creation that makes economy-wide booms and bust possible. Local, sector booms in the absence of credit expansion are processes of discovering profitable levels of investment.dmfdmfnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-137287538210786912010-07-27T11:34:46.539-05:002010-07-27T11:34:46.539-05:00Franco: good point, I think that's a distincti...Franco: good point, I think that's a distinction with a difference so I amended that sentence. As per FICOs accuracy, this is what the academics were saying were biased, excessive.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-86452615083375519922010-07-27T11:17:44.727-05:002010-07-27T11:17:44.727-05:00This is a fantastic post. I've had this sort o...This is a fantastic post. I've had this sort of idea kicking around my head for a while, but I was still very far from expressing it nearly so well (I call it "creeping endogeneity" which is probably meaningless to almost everyone). It seems like a variant of Goodhart's law.<br /><br />One quibble: you say "it by definition occurs in places that do not have simple quantitative signals"<br /><br />I've always thought that moving from a qualitative mortgage approval process to more quantitative FICO scores was an example. To me, the FICO score started out as a sound exogenous predictor, but continued reliance on it as such made it easier to dupe the dupes.Francohttps://www.blogger.com/profile/18060380816300517474noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-62776607134470517272010-07-27T10:06:06.430-05:002010-07-27T10:06:06.430-05:00Eric,
This is a very good general explanation.
S...Eric,<br /><br />This is a very good general explanation.<br /><br />Soros had nice explanation for boom/bust phenomena in the mortgage trusts, mid 70's.<br /><br />My sense is boom blows up when the decision criteria are reduced to only a handful - much easier for the mimics and frauds to pop up.michael websterhttps://www.blogger.com/profile/08709023254632080905noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-88772344886007417692010-07-27T09:50:15.895-05:002010-07-27T09:50:15.895-05:00tx! look under French's
"48 Industry Po...tx! look under French's<br /><br />"48 Industry Portfolios" <br /><br />has monthly returns back to 1926Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-25463940836617422322010-07-27T09:45:19.924-05:002010-07-27T09:45:19.924-05:00Superb, Eric!
I don't doubt you are correct a...Superb, Eric!<br /><br />I don't doubt you are correct about the extraordinary share price performance of banks up until 2007, either.<br /><br />But, could tell me what particular file to look for on that page you linked to of Fama/French?John McCormackhttps://www.blogger.com/profile/09153615162870606183noreply@blogger.com