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TagJohn Maynard Keynes

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Using Benford’s Law to Detect Bitcoin Manipulation

Market prices are not invariably equal to intrinsic values

For a while, there was a popular belief among finance professors that the stock market is “efficient” in the sense that stock prices are always correct — the prices that an all-knowing God would set. Thus, investors can buy any stock, even a randomly selected stock, and be confident that they are paying a fair price. This belief was based on seemingly overwhelming evidence that changes in stock prices are difficult to predict. Efficient market enthusiasts argued that if stock prices are always correct, taking into account all currently available information, then any changes in stock prices must be due to new information which, by definition, is impossible to predict. Therefore, the evidence that changes in stock prices are hard to…

Space and Galaxy light speed travel. Elements of this image furnished by NASA.

No Free Lunches: Bernoulli is Right, Keynes is Wrong

What the Big Bang teaches us about nothing

Jacob Bernoulli made a now obvious observation about probability over three-and-a-half centuries ago: If nothing is known about the outcome of a random event, all outcomes can be assumed to be equally probable. Bernoulli’s Principle of Insufficient Reason (PrOIR) is commonly used. Throw a fair die. There are six outcomes, one for each face of the cube. The chance of getting five pips showing on the roll of a die is therefore one sixth. If a million lottery tickets are sold and you buy one ticket, the chances of winning are one in a million. This reasoning is intuitively obvious.  The assumption about the die is wrong if the die is loaded. But you don’t know that. You know nothing. So Bernoulli’s PrIOR…

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Beware of Geeks Bearing Formulas—It’s Often Pseudoscience

Pseudoscience based on data without theory and theory without data undermine the credibility of real science, which is the key to human progress

Elsewhere I have warned of the perils of making decisions based on data without theory. For example, the patterns discovered by data-mining computer algorithms are often nothing more than meaningless coincidences. It is also perilous to go to the opposite extreme—to make decisions based on theory without data. Once upon a time, for example, economists were fond of sketching labor demand and supply curves and assuming that the economy was at their intersection. That is, labor demand is equal to supply, so that everyone who wants to work is working. The unemployed have chosen to be unemployed because they value leisure more than income. True believers were fond of this theory and little troubled by reality. Between 1929 and 1933,…