date:20021205


In a message dated 12/5/02 10:04:34 PM, [EMAIL PROTECTED] writes:

<< As a historical note abou the Laffer curve, it's interesting to see that

the phenomenon was already described by Bastiat in his 1847-02-21 article

"Curieux phénomène économique" (a peculiar economical phenomenon), itself

inspired from actual experience gathered in Great Britain before that time.

http://bastiat.org/fr/cpe.html

The phenomenon is also discussed in his latter essay

"Paix et liberté" ou "le budget républicain" (not yet digitized,

but available as scanned photos of the original french text).


Re-reading his Economic Harmonies (the whole of which are available in

English from econlib.org), I can but marvel at how he was more than just

a precursor of von Mises -- he did have a deeper and clearer understanding

of economic mechanisms than is even possible nowadays, with so ma >>

For that matter Alexander Hamilton makes a supply-side argument in The 
Federalist, some 60 years before Bastiat, when he talks about how exise taxes 
tend to be self-limiting: if you make the rate too high, you get less 
revenue.  The man known as "the greatest Secretary of the Treasury since 
Alexander Hamilton," Andrew Mellon, also used supply-side rational in arguing 
for his tax cut package, which resembled Reagan's initial proposals in a 
large number of ways.  In the book Mellon wrote pushing his tax cut proposal, 
Mellon quoted Adam Smith, so I believe there's something in Wealth of Nations 
that uses supply-side rational.

David Levenstam

Re: Median voter thm

> ... you almost 
> never hear candidates saying, "vote for me, I'm the most centrist
> candidate."
> David

They in effect do this by calling an opponent "extreme" or "not in the
mainstream" or "ideologue".

Democrats sometimes accuse Republicans of catering to the rich ("tax cuts
for the rich"), implying that the Democrats cater more to the median middle
class.

Republicans sometimes counter that the Democrats cater to fringy extreme
liberal groups.

Fred Foldvary

=
[EMAIL PROTECTED]

Re: reaganomics--elementary question

2002-12-05 Thread john hull

--- Francois-Rene Rideau <[EMAIL PROTECTED]> wrote:
"As a historical note abou the Laffer curve, it's
interesting to see that the phenomenon was already
described by Bastiat in his 1847-02-21 article..."

Wow.  That is interesting.  Thanks for pointing it
out!

-jsh

__
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Re: reaganomics--elementary question

2002-12-05 Thread Francois-Rene Rideau

As a historical note abou the Laffer curve, it's interesting to see that
the phenomenon was already described by Bastiat in his 1847-02-21 article
"Curieux phénomène économique" (a peculiar economical phenomenon), itself
inspired from actual experience gathered in Great Britain before that time.
http://bastiat.org/fr/cpe.html
The phenomenon is also discussed in his latter essay
"Paix et liberté" ou "le budget républicain" (not yet digitized,
but available as scanned photos of the original french text).

Re-reading his Economic Harmonies (the whole of which are available in
English from econlib.org), I can but marvel at how he was more than just
a precursor of von Mises -- he did have a deeper and clearer understanding
of economic mechanisms than is even possible nowadays, with so many false
ideas and not-so-relevant details constantly getting in the way.

[ François-René ÐVB Rideau | Reflection&Cybernethics | http://fare.tunes.org ]
[  TUNES project for a Free Reflective Computing System  | http://tunes.org  ]
L'état, c'est la grande fiction à travers la quelle tout le monde
s'efforce de vivre aux dépens de tout le monde. -- F. Bastiat, "l'État".

Re: Median voter thm


 Of course SOME voters--typically the
> uniformed, non-ideological mushy moderate median voter--have no memories,
but
> many do, and of course there's always the media to lamaste Republicans at
> least for changing positions (especially in a more conservative
direction).
> Frankly, almost no candidate seems to court the median voter; you almost
> never hear candidates saying, "vote for me, I'm the most centrist
candidate."
>
> David
>

But you do see liberals (when outside the northeast) describe themselves as
"moderates," while Republicans like Bush, with political stances hardly
distinguishable from the liberal John Kennedy in the early '60's, describe
themselves as "conservatives."  I think both parties tend to portray
themselves as more conservative than their actual policies would indicate.
Why might that be? Does this phenomenon happen in other countries too?

Also, does the necessity for successful politicians to strategically
position themselves on the issues to gain the maximum vote share suggest
that the ability to deceive the voters is more important in democratic
politics than the ability to persuade them?

As political marketing specialists--oops! I mean political
"strategists"--sometimes say, "Issues divide, images unite."

Furthermore, I typically notice that in Presidential debates both candidates
are careful not to distinguish themselves on specific issues too sharply
from their opponent.  I also notice that questions related to ethnic balance
or ethnic political rivalry are always too hot even to ask, much less
answer.  To a surprising degree, both our major parties in the US have
become ethnic parties, but this is never discussed publicly.  Related to
this, economists often focus on the value of open-borders labor markets for
global economic efficiency, but typically ignore the risk of political
destabilization; there is also a tendency to ignore the question of whether
the government of a nation has as its primary duty (of two duties) to
maximize global welfare or to balance the interests of its own voters' upper
and lower classes for a happy medium between growth and security.

~Alypius Skinner

Re: U of Cal scientists question efficient market hypothesis

> --- Alypius Skinner <[EMAIL PROTECTED]> wrote:
> >   A statistical physics model is predicting that the US stock market
> > recovery suggested by recent rises will only last until spring next
year,
> > before tumbling yet further.
>
> Why would this contradict efficient markets?

I originally called this message "physicists discover anti-bubble;" just in
case that was one the two possible reasons the message did not appear on the
list, I retitled it to be obviously pertinent to economics.  (But I also
cross-posted the first time, so maybe that was the problem.)  Of course,
that is not my complete answer to your question.

>
> The efficient-market proposition does not imply any absence of
> fluctuations, nor does it imply any limitation on the rise and fall of
> asset prices.  It states that prices take into account public beliefs.  If
> the expectation is that others will buy the assets at higher prices, then
> why would it be inefficient for the price to rise?

It has always seemed to me that the "greater fool" theory is incompatible
with market efficiency.  If prices really are going up for a period of time
solely on expectation that someone else will always be willing to pay prices
even more unjustified by business fundamentals than the price the previous
buyer paid, then it would be possible to predict that the overbid stocks
will inevitably move downward by a large amount.   That sort of extreme
price distortion  should not be possible in a highly efficient market.
After all, all stock purchases are made in expectation that the price will
go up in the future (which can only be because other buyers will be willing
to pay more for them).  If that is what you mean by an "efficient market"
then to say that securities markets are efficient becomes a tautology rather
than a theory.

>
> It seems to me that "efficient markets" is a micro phenomenon on specific
> assets at some moment ex ante, not a proposition about the whole financial
> market over the long term ex post.
>
> Fred Foldvary

So are you saying that the market pricing of some stocks are efficient, but
not the pricing of others? If the pricing of all (or nearly all) individual
assets are efficient, then the market as a whole for these assets must be
efficient.  If a large number of securities are irrationally priced (based
on business fundamentals) at any given time, then one can not speak of an
"efficient market," because the market average as a whole will become
distorted by the large number of "mispriced" securities.

Also, if the market (or the vast majority of its individual components, if
one wishes to focus on the individual trees rather than the forest) are
efficiently priced from, say, day to day, then "the whole financial market
over the long term" must be efficient.  The whole market cannot be
inefficient over the long term if its individual component assets are
efficiently valued at any given moment in time.

Of course, an economist or historian may say, "In the long run, markets will
rise" (or an astronmer or geologist may say, "Over the long run, the markets
will go to zero") for fundamental reasons without contradicting the
efficient market hypothesis--but one should not be able to use a statistical
analysis to correctly predict the ups and downs of market averages if the
efficient market hypothesis is correct.

The markets may or may not be efficient, but the term must be defined in
some way that has enough objective meaning to be analyzed and tested.

~Alypius Skinner

>
>
> =
> [EMAIL PROTECTED]
>

Re: Median voter thm


In a message dated 12/5/02 6:32:54 PM, [EMAIL PROTECTED] writes:

<< which is what I described.  I did not say there would be a Nash equilibrium
in pure non-cooperative strategies.  The two players nearest the edges move
towards the middle player, as I stated.  The third player then moves around
to get almost half the share.  Another player can then jump over to be
closest to the edge.  The equilibrium for non-cooperative players is indeed
a mixed probabilistic strategy. >>

This seems to suggest that voters have no memories, and do not hold changes 
in positions by candidates as suspect.  Of course SOME voters--typically the 
uniformed, non-ideological mushy moderate median voter--have no memories, but 
many do, and of course there's always the media to lamaste Republicans at 
least for changing positions (especially in a more conservative direction).  
Frankly, almost no candidate seems to court the median voter; you almost 
never hear candidates saying, "vote for me, I'm the most centrist candidate."

David

Re: reaganomics--elementary question

In a message dated 12/5/02 9:34:23 AM, [EMAIL PROTECTED] writes:

<< > Did "Reaganomics" essentially hinge on the Laffer

> Curve (i.e. the elasticity of tax receipts w/ respect

> to tax rate [?]), and its implications regarding tax

> revenue?  Or was there alot more to it than that?

Paul Craig Roberts has a fascinating book about economic policy in the early

years of the Reagan administration, titled Supply-Side Revolution (Harvard,

1984).  A few years ago, Roberts and Blinder were involved in an acrimonious

and rather nasty exchange about whether the Laffer curve was part of

official policy.  Essentially, as a I recall it, Blinder claimed

administration policy was based on the Laffer curve, Roberts said it was not

and dared Blinder to offer some evidence.  Blinder's response was to say

something like "it was well known at the time" but not offer any actual

evidence, and the exchange went downhill from there.

Bill Sjostrom >>

I've noticed that some economists seem to ignore not only the conflicts 
between the White House and Congress over policy, but the conflicts within a 
White House and within even the same party within Congress, and assume that 
the resulting mess that finally comes out represents the true policy 
inclinations of the president.  I remember one of my masters-level economics 
professors--the best teacher I've had in roughly 40 years of 
schooling--claiming that the Reagan administration had reverted to 
Keynesianism.I'd be willing to bet that you couldn't find more than one 
or two devoted Keynesians at most in the Reagan administration, and that 
nothing that his administration proposed, either as legislation or as 
regulation, came from a Keynesian motivation.

Some members of the Reagan administration believed in supply-side economics.  
In fact, it's hard to disagree with the core tenet of supply-side 
economics--incentives matter--although of course the CBO routinely ignores 
this very sensible tenet whenever it "scores" (calculates) its estimates of 
tax proposals.  Many members of the Reagan administration didn't believe in 
the notion that tax cuts would spur so much growth and reduce so much tax 
avoidance as to be more than fully self-financing.  A Treasury study 
indicated that the cuts in the TRA of 1984 were more than 90% self-financing. 
 I've never seen a study on the larger across-the-board tax cuts.  Virtually 
all the studies I've seen of cuts in the tax on captial-gains tax show it to 
be considerably more than self-financing.  Over the 8 years of the Reagan 
presidency, nominal tax receipts doubled, and even real tax receipts rose on 
the order of a third.  I've never seen anyone try to calculate how much of 
the increase came from the cuts in marginal tax rates; usually the opponents 
of tax cuts argue that tax receipts would have grown anyway from growth in 
the economy, thus trying to dismiss any incentive effect from cutting 
marginal tax rates, because they don't understand, or don't want to 
understand, that incentives matter.

David

Re: A Short Review of Hard Heads, Soft Hearts

--- john hull <[EMAIL PROTECTED]> wrote:
> Aren't payments in kind worth less than payments in
> cash, when the value is a significant portion of one's
> income, because they impose the consumption decision
> (for lack of a better term) on the individual?

Yes, assuming no tax difference.
Many payments are made in kind today because the employee does not have to
pay an income tax on it, or because it is tax deductible for the employer
but not for the employee.

Note, however, that psychic income is paid in kind.

>  If that is true, then maybe taxes
> in kind may be analogous?  Just a guess.

Yes, taxes in cash are in general preferred to taxes in kind, such as to be
drafted into the military or serve on a jury.  There is an economic
difference, but no moral difference in terms of being coercive.

The tax of restrictive regulations is paid in kind.

Fred Foldvary

=
[EMAIL PROTECTED]

Re: Fw: Median voter theorem


In a message dated 12/5/02 9:32:09 AM, [EMAIL PROTECTED] writes:

<< > Democratic politics appear to be (inherently?) oligopolistic.
> ~Alypius Skinner

This depends on the size of the voting pool and the method of electing.
With proportional representation (each political party gaining
representation based on its percentage of the vote) or tiny voting pools,
there is no inherent oligopolicity.

Fred Foldvary >>

I wonder...

So far as I know in the 54 years since the creation of the modern state of 
Israel, only two parties have ever controlled Knesset--Labor and Likud.  
Proportional representation doesn't allow--or at least hasn't allowed--the 
fringe parties there to stop being fringe parties.  The fringe parties there 
tend to pull the main parties out from the perceived center the way that 
party activitists pull the two major American parties (and the way that the 
Libertarian Party wishes it could in American, but can't because every time 
it helps elect a Democrat the news media report it as a mandate for more 
government).  I'm not sure that proportional representation precludes 
duopoly, or indeed makes it any less likely.  I think it may just bring more 
of the voters toward the tail of the distribution out from the major party 
primaries and into their own parties.

David

RE: Median voter thm

--- "Robson, Alex" <[EMAIL PROTECTED]> wrote:
> A uniform distribution works just as well.  

Of course MVT does not require a bell-shaped distribution of political
views, but empirically that is what is found in most populations.

> There is, of course, a mixed strategy equilibrium.  

which is what I described.  I did not say there would be a Nash equilibrium
in pure non-cooperative strategies.  The two players nearest the edges move
towards the middle player, as I stated.  The third player then moves around
to get almost half the share.  Another player can then jump over to be
closest to the edge.  The equilibrium for non-cooperative players is indeed
a mixed probabilistic strategy.

But players who play a cooperative game could agree that since they will
over the long run get 1/3 shares, being equal in all characteristics, they
may as well settle in one equilibrium.  In that case, I don't see why this
would not be at the 1/6, 3/6, 5/6 positions.

I included the possibility of merging two of the parties into one party. 
When the Republican Party became a successful 3rd party in 1860, the US
quickly reverted to two parties.  I don't see why this would not be a pure
strategy.  If there is no ideological drive, the three parties are better
off being two parties.  One could then ask why the two parties do not merge
into one party.  The answer is that in reality, parties operate in more
than one dimension.

The hot-dog vender analogy works with proportional representation, where
each party gets a share of the vote like hot-dog vendors getting a share of
the sales, but of course does not apply to winner-take-all plurality
voting.

With two hot-dog vendors, consumers are best off if the vendors locate at
the the 1/4 and 3/4 points, and the vendors are no worse off than if they
are both at 1/2.  So why could there not be a cooperative outcome where two
political parties agree to be at 1/4, 3/4?  That would also reduce the
threat of minor-parties arising at the edges.  That might account for the
differences we do see between Republicans and Democrats.  In the real
world, rivalry does not exclude cooperation.  Since empirically there does
seem to be a bell-shaped political distribution in the USA, the 1/4 and 3/4
points refer to population, so the difference in ideology would not be
large, but not tiny either.

Fred Foldvary

=
[EMAIL PROTECTED]

RE: Median voter thm. Elementary question

2002-12-05 Thread Robson, Alex

Fred Foldvary wrote: 

> MVT posits a bell-shaped distribution of political views.  

No, it doesn't.  A uniform distribution works just as well.  

>Comes a third vendor.  If he is in the center, each now gets 1/3 the sales.
>If one vendor moves just a bit away, he gets 1/2 while the others get 1/4.
>So a second vendor too moves a bit the other way.  The middle vendor, left
>with little share, now moves a bit further towards one end than one of the
>other 2.  The equilibrium will be that they will spread themselves so that
>each gets 1/3 of the sales, 1/6 on either side.  

This is incorrect.  There is no pure strategy equilibrium with three players.  [See, 
for example, Gibbons "A Course in Game Theory", or Mas-Colell, Whinston and Green 
"Microeconomic Theory"]  There is, of course, a mixed strategy equilibrium.  

Alex Robson
ANU

Re: Median voter thm. Elementary question

--- john hull <[EMAIL PROTECTED]> wrote:
> ...  So then I thought, suppose a third party were
> let into the race, does the MVT still hold w/ for 3 or
> more candidates? 

MVT posits a bell-shaped distribution of political views, and the parties
respond to that.  Think of hot-dog vendors at a beach.  Two vendors will
position themselves at the middle, each getting half the business.

Comes a third vendor.  If he is in the center, each now gets 1/3 the sales.
 If one vendor moves just a bit away, he gets 1/2 while the others get 1/4.
 So a second vendor too moves a bit the other way.  The middle vendor, left
with little share, now moves a bit further towards one end than one of the
other 2.  The equilibrium will be that they will spread themselves so that
each gets 1/3 of the sales, 1/6 on either side.  

So, for politic parties, expect a left, right, and middle party.  The
equilibrium might be unstable sometimes as the left or right party goes to
the middle to get a greater share, but if political positions are flexible,
the middle party will then move to the other side of that party, and if
they learn that moving around does not gain anything in the long run, the
equilibrium will hold.  In reality, a political party may not be able to
change its doctrine so easily, so we can see unequal shares for a while,
but over the long run, except for ideologically driven parties, they will
move towards equal shares, or more likely, two of the parties will merge,
and they will return to a 50/50 split at the middle.  The reason for the
merger is that two parties are more stable than three parties, since once
in a while there will be an ideologically driven candidate (e.g. Goldwater)
who will move towards one end and reduce the party's share.  That can
happen with two parties (again, Goldwater) but less often, since the middle
position is less ideology-driven.

Fred Foldvary

Fred Foldvary

=
[EMAIL PROTECTED]

Re: U of Cal scientists question efficient market hypothesis

--- Alypius Skinner <[EMAIL PROTECTED]> wrote:
>   A statistical physics model is predicting that the US stock market
> recovery suggested by recent rises will only last until spring next year,
> before tumbling yet further. 

Why would this contradict efficient markets?

The efficient-market proposition does not imply any absence of
fluctuations, nor does it imply any limitation on the rise and fall of
asset prices.  It states that prices take into account public beliefs.  If
the expectation is that others will buy the assets at higher prices, then
why would it be inefficient for the price to rise?

It seems to me that "efficient markets" is a micro phenomenon on specific
assets at some moment ex ante, not a proposition about the whole financial
market over the long term ex post.

Fred Foldvary

=
[EMAIL PROTECTED]

Re: Fw: Median voter theorem

> Democratic politics appear to be (inherently?) oligopolistic.
> ~Alypius Skinner

This depends on the size of the voting pool and the method of electing.
With proportional representation (each political party gaining
representation based on its percentage of the vote) or tiny voting pools,
there is no inherent oligopolicity.

Fred Foldvary


=
[EMAIL PROTECTED]

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<>

Re: reaganomics--elementary question

2002-12-05 Thread William Sjostrom

> Did "Reaganomics" essentially hinge on the Laffer
> Curve (i.e. the elasticity of tax receipts w/ respect
> to tax rate [?]), and its implications regarding tax
> revenue?  Or was there alot more to it than that?

Paul Craig Roberts has a fascinating book about economic policy in the early
years of the Reagan administration, titled Supply-Side Revolution (Harvard,
1984).  A few years ago, Roberts and Blinder were involved in an acrimonious
and rather nasty exchange about whether the Laffer curve was part of
official policy.  Essentially, as a I recall it, Blinder claimed
administration policy was based on the Laffer curve, Roberts said it was not
and dared Blinder to offer some evidence.  Blinder's response was to say
something like "it was well known at the time" but not offer any actual
evidence, and the exchange went downhill from there.

Bill Sjostrom


+
William Sjostrom
Senior Lecturer
Department of Economics
National University of Ireland, Cork
Cork, Ireland

+353-21-490-2091 (work)
+353-21-427-3920 (fax)
+353-21-463-4056 (home)
[EMAIL PROTECTED]
[EMAIL PROTECTED]
www.ucc.ie/~sjostrom/

Fw: Median voter theorem

But perhaps third parties don't siphon off more votes because they're
undercapitalized.  It's hard for an upstart domestic auto company to
challenge General Motors, or other established automakers.  Remember
DeLorean? He was a "third party" automaker.  Democratic politics appear to
be (inherently?) oligopolistic.
(Funny, I just remembered that the Soviet political system was often
described by western observers as an oligopoly--although they described
themselves as a "democracy."  More support for my pet theory that
differences between Communism and social democracy, while they do exist, are
in many ways less striking than the parallels.)

~Alypius Skinner

>
> I've never really studied the Median Voter Theorem.
> Recently I read where someone claimed that the U.S.
> political system was designed to keep the two parties
> nearly identical by keeping other parties out.  I
> assumed that the reason they Dems & Reps seem so close
> may be because of the MVT--they want the middle guy's
> vote.  So then I thought, suppose a third party were
> let into the race, does the MVT still hold w/ for 3 or
> more candidates?  Does it weaken as more candidates
> are added, or do they all bunch toward the center for
> for any n>2, where n is the number of candidates?
> Does anybody know of a good discussion of it online?
>


Well look at the 1992 presidential race.  You had Bob Dole, the
tax-collector
> for the welfare state who never met a tax hike he didn't like and the
> architect of affirmative action, Bill second-biggest tax hike in history,
and
> Ross let's fix what's broke by raising taxes Perot.  You essentially had
> three mushy-moderate statist candidates running for office, and nobody
openly
> advocating either mainstream conservatism or mainstream liberalism (if
there
> is still such a thing).  We needed Perot's brand of mushy-moderate statism
> like Al-Queda needs a new form of explosive.
>
> John Anderson in 1980 likewise offered "fiscal conservatism and social
> moderation," in other words, warmed over Jimmy Carter, although since
Reagan
> won, and would have won even had Carter gotten all of Anderson's votes
> (unlikely in the extreme based on exit-polling) it would seem we had two
> candidates rather far from the media voter.
>
> Still, most third party candidates in America (and perhaps in some of the
> parliamentary democracies) seem to offer platforms that are determinedly
away
> from the median voter's squishy preferences.  I think of candidates like
> Strom Thurmond, who probably captured the median white voter in the South,
> but fared poorly with most other voters.  Green Party and Libertarian
Party
> candidates, offering platforms well away from the median voter, fare even
> more poorly, at least in all but small local races.  (I recall a bar owner
in
> Denver, registered as a Libertarian, getting elected to the Denver
Election
> Commission while I lived out there.)
>
> >From the little I know about the MVT--and it's little indeed--it seems to
> assume that the candidates have no ability to influence the median voter,
so
> as to move it more or less in one direction or the other.  If so I'd have
to
> say that it makes a more-than-heroic assumption.  I think few people would
> have guessed that during what appeared to be the heyday of unabashed
> statist-liberalism and in the wake of Watergate that a
strongly-conservative
> Republican candidate would win by a large majority in 1980.  It's
remarkable
> how quickly attitudes appeared to shift on a wide variety of issues from
> busing to taxes, to welfare programs to abortion to defense.
>
> While it's undoubtedly true that many people secretly agreed with Ronald
> Reagan's positions throughout the 1970s but feared to admit it to avoid
> social condemnation, it must also be true that Reagan and his supporters
> persuaded others who had not previously agreed, thus shifting the median
> voters toward the "right" across a spectrum of issues.  By focusing on the
> median voter, the MVT seems to give credence to the mushy moderate's
election
> creed--"pander to me or lose when I vote for your opponent"--but
oftentimes,
> as we've seen in recent elections with Libertarians pulling votes from
> Republicans and Greens pulling votes from Democrats that not pandering to
the
> extremes loses elections too.
>
> Indeed, it's not clear that the median voter theorem actually describes
the
> process by which candidates typically win in highly-publicized elections.
> Presidents don't typically win by persuading all the mushy moderates, who
> tend to break both ways and can't generally be relied upon by a major
party
> no matter what it does, but rather by building coalitions of voters
> highly-motivated  by various issues.  Put together a coalition of blacks,
> Jews, Northern WASP elites and labor union members and you can win even if
> you're too liberal (or too statist) for the median voter.  Put together a
> coalit

U of Cal scientists question efficient market hypothesis




 
http://www.newscientist.com/news/news.jsp?id=ns3124
 


  
  

  Statistical physics predicts stock market 
  gloom 
  
 
  
11:59 02 December 02
  
 
  
NewScientist.com news service
  
 
  

  A statistical physics model is predicting that the US stock market 
  recovery suggested by recent rises will only last until spring next year, 
  before tumbling yet further. 
  Physicists Didier Sornette and Wei-Xing Zhou at the University of 
  California in Los Angeles claim to have identified an "anti-bubble" in the 
  Standard and Poor's 500 stock market index. Their model also describes a 
  similar anti-bubble in the Japanese Nikkei index in the early 1990s, which 
  preceded a decade of decline.
  However, Neil Shephard, an economist at the University of Oxford, UK, 
  is sceptical. "Firstly, the track record of empirical prediction isn't 
  very good and secondly, economic theory says it shouldn't work," he told 
  New Scientist. This is because traders act on new information about 
  the market by buying or selling shares, making it impossible to make a 
  prediction without it affecting the outcome.
  But the physicists' predictions are in line with those of some others. 
  Haydn Carrington, a dealer at spread betting firm City Index in London, 
  also believes the US market is in a long decline, but that a short term 
  rally is likely: "The Americans are optimistic about recovery, so that 
  will probably happen."
  Herding behaviour 
  Bubbles and anti-bubbles are traits of herding and imitative behaviour, 
  Sornette says. Investors and traders constantly exchange opinions and 
  information, generating a feedback loop that can drive the performance of 
  the market.
  A bubble, or bull market, occurs when optimism spreads, pushing the 
  market value artificially high. The bubble may then burst in a dramatic 
  crash, but if not, a slow period of downwards adjustment will follow - a 
  bear market, which Sornette calls the anti-bubble phase.
  An anti-bubble market has two key characteristics. The value slides 
  inevitably downwards, but oscillates as it does so. The value of the 
  S&P 500 has been riding this rollercoaster since August 2000.
  Sornette says that the "up" seen now is just one of the oscillations, 
  and that hopes of a recovery will be dashed by a "down" in mid 2003. And 
  the trough that it sinks into may be deeper than this year's low, he says. 
  
  Failure mechanisms 
  


   

  

   

  

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Weblinks 

   

  
Didier 
Sornette, UCLA 

   

  
City Index 

   

  
Quantitative Finance 

   

  
S&P 
500 

   

  

   
  The model used to make this prediction describes "crowd" behaviour of 
  the type Sornette expects from traders and investors. It consists of a set 
  of three equations that describe feedback processes. 
  He developed the equations when studying failure mechanisms in 
  materials - the way that cracks develop and cause damage is similar to the 
  way that information seeps through the market and changes opinion, he 
  believes.
  The model requires the input of two constants: one quantifies the 
  overall trend (down in an anti-bubble), the other the frequency of 
  oscillation. He chose constants such that the model matched the S&P 
  data from the past few years - and then extended the model to 2004.
  Journal reference: Quantitative Finance (vol 2, p 468) 

  
 
  

  Jenny Hogan
  

  This story is from NewScientist.com's news service - for more exclusive 
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  to New Scientist print edition.

Re: Median voter thm. Elementary question