19 October 2011 – The Aleph Blog

Weighing Beats Voting

Posted on 19 October 2011 by David Merkel

Correlations are high.? Risk-on, risk-off drives the market as market players trade ETPs and baskets rather than individual stocks.? Market players worry about policy, and whether it will be inflationary (bullish) or deflationary (bearish).

What an ugly time to be a value investor, and a long-term industry rotator.? The time cycle has shrunk to tiny proportions relative to the likely life of the assets being traded.

But I take heart that it will not always be this way.? As Ben Graham said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

Eventually, for industries where the companies are worth a lot more than the current price, there will be buyouts.? For industries where companies are worth less, there may be IPOs.

I believe that correlations will reduce from here.? It may not be dramatic, but they will fall.? Whenever there is a dominant paradigm for asset pricing, there are assets that get mispriced.

My expectation is that there are many companies earning money while trading at a discount to adjusted book that will be bought out by others.

Improving Publishing in the Social Sciences

Posted on 19 October 2011 by David Merkel

I?ve been toying with an idea that I think would improve economic and biometric research, but will never get adopted.? Split research into two components:

Generating research ideas
Doing the research

But here?s my twist: economists and biometricians could submit ideas to a central database, but would be barred from doing that particular project.? No researcher would be allowed to work on his own idea ever again.? Researchers would be assigned research ideas randomly from the central database, allowing for some modest amount of customization as to what types of projects they have the skills to do.

The researchers would then take a fresh look at the ideas, because they don?t have a dog in the fight.? They haven?t been defending a point of view on the idea, so the idea will be investigated with less bias.? This would have the salutary effect of creating more well-rounded researchers that have broader interests, and, more skeptical researchers.? It also might allow journals to publish articles that indicate that a certain area of inquiry is a dead end, which does not get done as often as it should.

This is an attempt to make economics and biometrics into sciences, by forcing more neutrality into the research.? The scientific method requires a neutral observer, but sadly, many researchers become patrons of their pet ideas, and the sorry excuse called ?peer review? at the journals does not weed that out.? Peer review reinforces the biases of the majority most of the time.

My proposal will never be adopted because the cozy academic guilds are ever so happy to leave their ?research? unchallenged, so that they can keep their cushy jobs, even though they produce little of lasting value.

Summary: if an idea is true, it shouldn?t matter which competent researcher investigates it.? We believe in a neutral observer.? Well, let?s make the observer genuinely neutral, and see how much trash gets discarded, and real truths preserved.