[smokeyj]

I'm always perplexed by the notion of trying to "model" an economy. I don't understand how aggregate statistics about a market reveal any insight into how to create sustainable value. I feel like it's similar to knowing the past winning numbers on a Roulette table, because it provides no actionable insight to future winning numbers.

[TheCowboy]

There are many models considered common knowledge in economics that possess strong explanatory and predictive power.

Though in recent times people tend to pick and choose which models they base their thinking on, depending upon their chosen political agenda.

Brief example: There has been a lot of political hand waving about possible inflation or even hyperinflation. If you look at a version of the Phillips Curve, unemployment and inflation have an inverse relationship. High unemployment = low inflation or worse. And inflation has remained low, while deflation has actually been more of a threat, and is actually a problem in many countries.

[tbrownaw]

> Phillips Curve

Wikipedia seems to think that the 1970s in the US show that it doesn't work.

[Symmetry]

Yes, the Philips Curve is pretty much the poster child example of the Lucas Critique. That is, observed invariants often cease to be invariant when policy changes. When we well and truly went off the gold standard the Philips Curve ceased to have predictive power for the US economy.

More details: http://www.themoneyillusion.com/?p=9677

[beagle3]

On the contrary. Taking your analogy further:

In economy, you find out that whenever "Gentleman Jim" bets, he tends to win 70% of the time, rather than the 49% everyone else gets. Now, depending on policy, you either:

a) forbid jim to play b) readjust jim's token-to-money conversion ratio so he is on par with other players c) invest your money with jim

Note, though, that this being a zero sum game, anything other than (a) will bankrupt the house....

[dereg]

Nassim Taleb addresses this sort of thinking. He calls it a "ludic fallacy", which is the over application of games to our down detriment. http://en.wikipedia.org/wiki/Ludic_fallacy

[da_dude4242]

In what sense is this a zero sum game?

Sure if economics could be reduced to gambling it is zero-sum but betting in economics is betting on those who will create value(ideally).

[washedup]

What you are describing is a Random Walk, 50/50 chance of going up or down, the previous data point holds no significance for the future. Mandelbrot discusses how this viewpoint is wrong in "Misbehavior of Markets" and describes market patterns using two movements: short trends and even shorter bursts. His multifactoral model uses these two ideas to model a market, however prediction is always difficult.