Wednesday, November 09, 2005

Thesis blabbering

Ok, there are several things I wanted to talk about, but I'll discuss my thesis now, since it's rather pressing for me, and it's really long and boring.

In a nutshell, my thesis idea is based on the efficiency of markets and on rationality in general. Predicting future events is never an easy task, in that no one has a crystal ball. In International affairs we see this with country evaluators. Many institutions and organizations spend a great deal of money and resources in trying to predict economic risk, political risk, debt default rates, human rights indices, among many others. The problems with this are obvious. Variables may be missing, not relevant, or weighted incorrectly. Analysts can also be biased or have other aims.

My idea would be to improve on this by changing the method entirely. Basically, looking at empirical data, markets have been more precise in predicting events than any form of polls or analysts. Markets use an infinite amount of information, gather it together, and incorporate it in the security much more quickly than any single agent would be able to.

This might seem weird, in that any form of analysis of trends or fundamentals would make no difference. Well of course information can be useful, but it's also known that constant investment in a diversified porfolio (read, shooting darts at a WSJ stock list) gives you just as good returns as any.

Ok, there's also one interesting example of this. Michael Maboussin, a business prof in Columbia, asks his incoming students every year what the total number of assetts for IBM was in 1989. Obviously, their answers are all over the board (no one knows that by heart). But, every year, the mean of the glass is within 5% of the true number. Cool, eh?

Anyway, so that's all fine and dandy, and I can find 100 more examples of this, but in order to prove my point, I'd like to recreate it.

Ah, by the way, my idea would be to use this market method to predict FDI into different countries. This could serve public policy in that, if we have a more precise way of predicting this, then companies, organizations and others can use it as an indicator.

Ok great, so now I have to try to recreate this whole market in a lab setting, so I'm wondering what to do. Since I'm getting no funding my options are:

A) Send out e-mails to many people, telling them they can trade on future values of say 5 countries, and they're given an endowement of $1000, and they can trade until the day before new FDI levels (for 2005) are announced. The more precise ones are paid off. (trading would be done by e-mailing me, and i'd post what levels we're at at the end of everyday or week)

B) Perform this in a lab. One of my professors offered this, but since a futures market should be conducted over time and with new information and whatnot, I said it wasn't ideal.

C) Take experimental Econ next semester and do it as my major assigment.

Anyway, I'm going with option A for now, and seeing if it's feasible. Option B wouldn't reflect real life enough, and Option C is too late for me (there's still a chance none of this works out, in which case I'm screwed).

So that's basically it. I'm just writing it down because I have no idea what's going to happen with this. So it'll be interesting for me to look back in a couple months. Or not. Actually it won't. There's a big chance that none of this works out, in which case I'll be changing my thesis to the 6 party talks on North Korea. But I don't know when the cut off date for this should be. At some point I need to choose one or the other and stick with it, otherwise I'll be spreading myself way too thin.

If you got through this whole thing I'm impressed. But if you have any suggestions please let me know. I hate being all up in the air like this.


Security Joe said...

split the difference and do your market thing on the outcomes of the NK talks. now, that would be cool

Lugano said...

Hmmmmm. That's so crazy it just might work! I can't really test it though. And since it's a one-time event it would be temporary. Well, not very temporary the way things are going. Ok. nvm.