Monday, May 20, 2013

Maybe he meant the toolbox of some economists...

Greg Mankiw has a piece up at the New York Times that opens with this assertion: "Nothing in the toolbox of economists makes us good stock pickers."

The article does a good job explaining the relevant economics concepts to a lay audience (as expected given the author), but I did notice a slight but amusing omission from this:
Advocates of market rationality now say that stock prices move in response to changing risk premiums, though they can’t explain why risk premiums move as they do. Others suggest that the market moves in response to irrational waves of optimism and pessimism, what John Maynard Keynes called the “animal spirits” of investors. Either approach is really just an admission of economists’ ignorance about what moves the market.
I'm not entirely sure Keynes would have conceded that point:
Keynes was ultimately a successful investor, building up a private fortune. His assets were nearly wiped out following the Wall Street Crash of 1929, which he did not foresee, but he soon recouped. At Keynes's death, in 1946, his worth stood just short of £500,000 – equivalent to about £11 million ($16.5 million) in 2009. The sum had been amassed despite lavish support for various causes and his personal ethic which made him reluctant to sell on a falling market when if too many did it could deepen a slump.[135]
Just imagine how much Keynes would have socked away if he didn't have that live-for-today attitude.


  1. I might be missing something, but Keynes making a fortune from the market does not necessarily imply that he knew something about the stock market?

  2. Mark:

    I wonder about this story. England was such an insider society back then, maybe Keynes had some inside information?

    1. Andrew,

      There's a bigger question (too big for me) about how markets have changed over the past 65 years, but as for Keynes' talents as an investor, here are some quick thoughts:

      Keynes apocrypha is a major genre (remember the towels on the restroom floor?). Rumors about Keynes' trading practices could certainly be true, but there's no reason to give them any special weight.

      I'm not knowledgeable on the subject, but what I do know about Keynes the investor seems at least consistent with the idea that he was smart, serious (and more importantly, playful), and had a feel for the markets.

      For an investor's view of Keynes the investor, try the opening chapter of the Money Game by George Goodman (a.k.a. Adam Smith). Goodman talks not only about Keynes' successes but also his enjoyment of "the game" and points out that Keynes himself said that investing was intolerably boring if one did not enjoy it as a kind of gambling. Goodman even suggests that much of Keynes' insight into markets as an economist can be traced back to his experience as an investor.

      Of course, approaching something as a sport does not preclude cheating but it requires a particularly pathological kind of cheating and Keynes would have had to have done a great deal of it to rack up the kind of numbers he managed for himself, his college and his friends.

    2. Mark:

      Just to be clear, I was not saying that Keynes was cheating (or, for that matter, that he wasn't; I have no idea) but rather that, in his day, markets moved slowly and there was a lot of informal inside information. Keynes was a smart guy, he could read between the lines, he mixed with bigshots, so he could've heard a lot of information that allowed him to make informed decisions. In that sense, trading based on inside information wouldn't be cheating; it would just be the way the game is played. To use a poker analogy, Keynes could've been reading people's reactions, not peeking at their cards.

    3. Andrew,

      Good analogy with the poker game. It points to one of the two main difficulties with this discussion, the grayness of insider information which can range from idle gossip to leaked earning reports.

      The other problem which you also allude to is the different nature of today's markets. Would Keynes' insights have given him an edge in an age of algorithmic trading?

      With all that in mind, I'd still say that Mankiw made an odd choice when he used Keynes to support his case.