WEBVTT NOTE Financial Economics for Real People 1 00:00:00.000 --> 00:00:09.000 The conference has been great so far, but I have to admit that as soon as I saw the schedule, 2 00:00:09.000 --> 00:00:18.000 I knew it would be good because I think this is the only financial conference this year with two speakers in a row named Jean. 3 00:00:18.000 --> 00:00:28.000 And that's a plus at any conference. I think they should all have more speakers named Jean, so I knew we were set here. 4 00:00:28.000 --> 00:00:36.000 When I was preparing the talk, I talked to Lew a little bit about the time factor and managing the time talking. 5 00:00:36.000 --> 00:00:42.000 And Lew had said, well, you know, a big thing is your pacing. 6 00:00:42.000 --> 00:00:47.000 Now, you know, I didn't want to write that much, so you have to excuse me. 7 00:00:47.000 --> 00:00:55.000 I'll be talking like this. 8 00:00:55.000 --> 00:01:04.680 What I want to talk to you about today is I'll call it an Austrian sojourn through the land of modeling. 9 00:01:04.680 --> 00:01:14.720 It's something that's extremely prevalent in the financial industry and I joined an equity trading 10 00:01:14.720 --> 00:01:22.400 firm and found that they were making extremely extensive use of mathematical models in their 11 00:01:22.400 --> 00:01:29.280 Trading. Now, as an Austrian, this was something puzzling to me and I wound up, 12 00:01:29.280 --> 00:01:34.720 you know, I've spent a lot of time thinking about this the last few years, 13 00:01:34.720 --> 00:01:40.600 puzzling over, you know, what was going on, how did this fit with what I knew of 14 00:01:40.600 --> 00:01:48.000 Austrian theory. Hopefully for the people who are listening, this will give you a 15 00:01:48.000 --> 00:01:54.100 That's a way to view what's going on with modeling in the financial industry. 16 00:01:54.100 --> 00:01:59.180 You may be someone who's ambitious enough to attempt to create your own models to use 17 00:01:59.180 --> 00:02:06.240 in your trading, or you may invest with someone who trades off of models, who uses models 18 00:02:06.240 --> 00:02:07.640 and they're investing. 19 00:02:07.640 --> 00:02:14.800 I think in either case, hopefully the view I give you of what's going on with modeling 20 00:02:14.800 --> 00:02:21.480 will be of some cognitive assistance in looking at that issue. 21 00:02:21.480 --> 00:02:28.160 So I'll start out by telling you about my journey into the land of models. 22 00:02:28.160 --> 00:02:36.000 I joined a very successful equity trading firm about three years ago. 23 00:02:36.000 --> 00:02:39.800 Now, I'll explain very successful. 24 00:02:39.800 --> 00:02:44.600 When I joined, they were in their 15th straight profitable year. 25 00:02:44.600 --> 00:02:48.400 The three years since have all been profitable. 26 00:02:48.400 --> 00:02:58.100 The year before I joined, the return on partner's equity was only 20%. 27 00:02:58.100 --> 00:03:02.580 The year I joined, they had an 80% return on partner's equity. 28 00:03:02.580 --> 00:03:05.940 It wasn't because I joined. 29 00:03:05.940 --> 00:03:09.560 The next year, they had a 106% return. 30 00:03:09.560 --> 00:03:14.280 And for 2001, I think the return is 40%. 31 00:03:14.280 --> 00:03:23.640 More astoundingly to me, the firm hardly ever had a losing day trading. 32 00:03:23.640 --> 00:03:32.480 The firm posts running P&L to the internal web on a number of the areas it trades, 33 00:03:32.480 --> 00:03:38.600 so everyone inside the firm every 10 minutes can see our P&L as we progress through the day. 34 00:03:38.600 --> 00:03:46.400 and once in a while there's a down day but pretty much the firm does not lose 35 00:03:46.400 --> 00:03:56.120 any day and they're doing all this they're achieving these returns and 36 00:03:56.120 --> 00:04:02.600 and not having losing days not swinging for the fences or trying to make a 37 00:04:02.600 --> 00:04:08.120 killing in any particular stock they look to make three cents a share that's 38 00:04:08.120 --> 00:04:14.120 That's their goal. If they make three cents a day on the shares they trade, they're extremely happy. 39 00:04:16.120 --> 00:04:21.120 This performance caught my eye. This was not a random walk down Wall Street. 40 00:04:24.120 --> 00:04:32.120 As a student of economics, this looked to me like something worth studying and trying to figure out what was going on. 41 00:04:32.120 --> 00:04:42.680 So first I'm going to tell you a little bit about what they do so you can see how they're using models in their trading. 42 00:04:42.680 --> 00:04:51.760 I'll digress for a moment. A sidelined piece of advice, don't try this at home. 43 00:04:51.760 --> 00:05:01.240 I bring this up because I've seen a lot of ads for day trading operations and you read this 44 00:05:01.240 --> 00:05:07.240 this booklet and get this piece of software and you'll be a day trader just like the pros. 45 00:05:07.240 --> 00:05:19.240 Well, after being at this firm, I consider this something like someone who says we'll give you this helmet and shoulder pads and this pamphlet on how to play football and you too will be able to play in the NFL. 46 00:05:19.240 --> 00:05:26.240 You know, these people have hundreds of trader years of experience on their trading floor. 47 00:05:26.240 --> 00:05:38.240 They have millions of dollars of investment in technology, high-speed data feeds, teams of programmers, a math PhD generating models for them. 48 00:05:38.240 --> 00:05:49.240 You're not going to be able to do that at home. There are exceptions. You could be the Michael Jordan of day trading and play in the same field as them. 49 00:05:49.240 --> 00:05:55.360 But for the average investor, you know, don't think you can enter into this 50 00:05:55.360 --> 00:06:04.320 arena against people like this on short-term trading. As I said, they use 51 00:06:04.320 --> 00:06:10.280 quite a bit of mathematical modeling. A lot of the trading is automated and 52 00:06:10.280 --> 00:06:17.600 in fact they count on this for their edge in a lot of areas. The computer can spot 53 00:06:17.600 --> 00:06:28.600 This is not, hopefully, a price discrepancy and trade on it before a human trader would have time to react and pick up the phone and execute the trade. 54 00:06:28.600 --> 00:06:33.600 There is a downside to this way of doing things. 55 00:06:33.600 --> 00:06:40.600 One day a trader at the firm accidentally bought 102,000 shares of a stock as a result of a program bug. 56 00:06:40.600 --> 00:06:48.480 He meant to buy 2,000 to hedge a position and the program put out the order 51 times before someone killed it 57 00:06:49.960 --> 00:06:58.160 The stock happened to be Enron and the day happened to be the day before the stock collapsed from 4 to 50 cents 58 00:06:59.840 --> 00:07:04.520 We also on occasion we found ourselves accepting our own offer for a stock 59 00:07:04.520 --> 00:07:10.480 The program puts out a bid at a hundred and a few seconds later the program says, 60 00:07:10.480 --> 00:07:17.360 a hundred looks like a good price, I'll buy. So we have an occasion of traded with ourselves. 61 00:07:17.360 --> 00:07:24.560 So there is a downside to this kind of thing. I'll look at one aspect of the business. 62 00:07:24.560 --> 00:07:31.880 They do what's called risk arbitrage. The math PhD in the traders have spent a couple of years 63 00:07:31.880 --> 00:07:36.120 There's refining a model of merger deals. 64 00:07:36.120 --> 00:07:41.120 The trader who's going to trade the deal, input some parameters to a program, basically 65 00:07:41.120 --> 00:07:47.740 babysits the program through the day and allows it to trade, you know, half a dozen traders 66 00:07:47.740 --> 00:07:52.840 in that area are trading several million shares a day, several thousand trades. 67 00:07:52.840 --> 00:07:59.160 They may buy and sell the same stock 50 times in a day, coming in and out. 68 00:07:59.160 --> 00:08:04.840 Our exceptions are times when they intervene and we'll look at that because that's important. 69 00:08:04.840 --> 00:08:08.480 What they're looking for is mispricings. 70 00:08:08.480 --> 00:08:16.680 Let me, right under death, we'll put this. 71 00:08:16.680 --> 00:08:21.800 Let's say that Sun Microsystems is going to buy Apple Computer. 72 00:08:21.800 --> 00:08:36.840 And we've got Sun trading at 22 and Apple is at 16 the day the merger is announced. 73 00:08:36.840 --> 00:08:43.360 Now we'll imagine it's going to be a one-for-one stock deal, so the day the merger goes through, 74 00:08:43.360 --> 00:08:47.060 one share of Apple is going to exchange for one share of Sun. 75 00:08:47.060 --> 00:08:54.700 Now, what we know at the time of the announcement is, if the deal goes all the way to completion, 76 00:08:54.700 --> 00:09:01.260 the day the deal completes, they're going to arrive at the same price. 77 00:09:01.260 --> 00:09:05.660 We know that because the instant before the deal goes through, if they were trading at 78 00:09:05.660 --> 00:09:10.540 different prices, there's essentially money lying on the table for someone just to pick 79 00:09:10.540 --> 00:09:11.580 up. 80 00:09:11.580 --> 00:09:16.940 If right before the deal happens, we're this 20s arbitrary, nice round number. 81 00:09:16.940 --> 00:09:26.940 If sun's at 20 and apple's at 19, right before the deal goes through, you buy as much apple as you can and get $20 an instant later. 82 00:09:26.940 --> 00:09:32.940 So we know that these prices are going to converge to this point should the deal go through. 83 00:09:32.940 --> 00:09:40.940 So we've got a convergence over time. In the meantime, though, there's risk that the deal will not complete. 84 00:09:40.940 --> 00:09:48.000 You may have a regulatory agency stepping in. You may have something like Dynergy Enron where 85 00:09:48.000 --> 00:09:53.780 son looks at Apple's books and says, whoa, you've been lying to us, you know, this isn't what we 86 00:09:53.780 --> 00:10:00.340 said we were getting into. You may have something like HP Compact where a major shareholder starts 87 00:10:00.340 --> 00:10:04.940 to create a fuss that looks like it's going to go through I guess but you know major shareholder 88 00:10:04.940 --> 00:10:13.820 could stop the deal. So what they're doing is they're trying to factor in the 89 00:10:13.820 --> 00:10:21.940 risk and find a band between which these stocks should trade. Anytime, let's say 90 00:10:21.940 --> 00:10:27.740 here they think there should be a 10% difference in the stock price. Well, they 91 00:10:27.740 --> 00:10:33.780 find Sun trading at 22 and Apple at 18. They're going to sell Sun, buy Apple and 92 00:10:33.780 --> 00:10:39.460 and they wait for the stocks to move back within what their model says the band should be, 93 00:10:39.460 --> 00:10:43.780 then they reverse what they just did and they'll do that all day long. 94 00:10:43.780 --> 00:10:51.540 If those stocks keep doing this, they could do it 50 times a day and, you know, the volume, 95 00:10:51.540 --> 00:10:56.100 they like volume, they like stuff happening, so the prices keep moving. 96 00:10:56.100 --> 00:10:59.220 Their returns were down a little bit last year because volume was down. 97 00:10:59.220 --> 00:11:08.020 So I saw them doing this and you know it's very puzzling to me because I'm 98 00:11:08.020 --> 00:11:13.340 convinced that the Austrian critique of mathematical economics is sound and I'll 99 00:11:13.340 --> 00:11:19.740 read you something from Mises. He says logic and mathematics deal with an ideal 100 00:11:19.740 --> 00:11:24.300 system of thought. The relations and implications of their system are 101 00:11:24.300 --> 00:11:27.300 are coexistent and interdependent. 102 00:11:27.300 --> 00:11:29.100 We may as well say they are synchronous 103 00:11:29.100 --> 00:11:31.100 or that they're out of time. 104 00:11:31.100 --> 00:11:33.980 Within such a system, the notions of anteriority 105 00:11:33.980 --> 00:11:36.540 and consequence are metaphorical only. 106 00:11:36.540 --> 00:11:38.060 They do not refer to the system 107 00:11:38.060 --> 00:11:40.260 but to our action in grasping it. 108 00:11:40.260 --> 00:11:43.300 The system itself implies neither the category of time 109 00:11:43.300 --> 00:11:45.180 nor that of causality. 110 00:11:45.180 --> 00:11:47.820 There is functional correspondence between the elements 111 00:11:47.820 --> 00:11:50.780 but there is neither cause nor effect. 112 00:11:50.780 --> 00:11:54.060 What distinguishes economics from the logical system 113 00:11:54.060 --> 00:11:59.820 The theorem is precisely that it implies the categories both of time and of causality. 114 00:11:59.820 --> 00:12:15.060 So just to explain what's going on here in this statement, Pythagorean Theorem, 115 00:12:15.060 --> 00:12:18.660 A squared plus B squared equals C squared. 116 00:12:18.660 --> 00:12:22.460 There's nothing here about cause or time. 117 00:12:22.460 --> 00:12:30.620 B and A don't cause C to be a certain length, and C doesn't cause A and B, and it's not 118 00:12:30.620 --> 00:12:37.360 like B emerges and then subsequently A and C emerge, this is a timeless form. 119 00:12:37.360 --> 00:12:50.900 Cause and effect and before and after are absent in mathematical functions. 120 00:12:50.900 --> 00:12:55.940 With action it's different, we have to understand that for the human actor there is a past that's 121 00:12:55.940 --> 00:13:00.420 the soil of their action, there's a present where they can sow the seeds of acting and 122 00:13:00.420 --> 00:13:04.300 a future in which they hope to reap the fruit of that action. 123 00:13:04.300 --> 00:13:09.660 And a human actor must believe that they can cause and effect or they won't act. 124 00:13:09.660 --> 00:13:17.340 So this is Mises' basic critique, quick version of why mathematics is not the essential way 125 00:13:17.340 --> 00:13:20.420 to understand economics. 126 00:13:20.420 --> 00:13:25.820 I'll give you a quick example from the neoclassical world of the reverse view. 127 00:13:25.820 --> 00:13:31.740 Steve Landsberg in his micro-textbook Price Theory says it is important to distinguish 128 00:13:31.740 --> 00:13:33.780 causes from effects. 129 00:13:33.780 --> 00:13:39.780 For an individual demander or supplier, the price is taken as a given and determines the 130 00:13:39.780 --> 00:13:42.460 quantity demanded or supplied. 131 00:13:42.460 --> 00:13:48.260 For the market as a whole, the demand and supply curves determine both price and quantity 132 00:13:48.260 --> 00:13:56.900 simultaneously. Now if you think about what he's saying in the common little 133 00:13:56.900 --> 00:14:04.980 supply demand curve graph you'll see in a micro textbook, no human is able 134 00:14:04.980 --> 00:14:13.860 to do anything about a price. The curves set the price. So if apples are 59 cents 135 00:14:13.860 --> 00:14:21.860 Well, the curves determine the 59 cents. No human had to do anything to bring the price to 59 cents. 136 00:14:21.860 --> 00:14:27.860 It leaves completely unexplained how a price can change. 137 00:14:27.860 --> 00:14:30.860 Clearly, prices only change because of human action. 138 00:14:30.860 --> 00:14:37.860 Someone decides, I can lower the price to 58 cents and my cost of production will go down, so on. 139 00:14:37.860 --> 00:14:42.860 I can make a bigger profit. Or if I bid this, I can get more and I have a good use for them. 140 00:14:42.860 --> 00:14:48.540 So the fact that these give us a rough picture of market behavior is the 141 00:14:48.540 --> 00:14:56.420 effect of human action. It's certainly not the cause of human action. Mises says 142 00:14:56.420 --> 00:15:01.280 the mathematical economists disregard the market process and evasively amuse 143 00:15:01.280 --> 00:15:06.260 themselves with an auxiliary notion employed in its context and devoid of 144 00:15:06.260 --> 00:15:09.260 have any sense when used outside that context. 145 00:15:12.260 --> 00:15:20.260 Because we're dealing with human action, we're also not going to get the constants that the physical sciences will give us. 146 00:15:20.260 --> 00:15:27.260 Whatever you choose or decide today, tomorrow you have the opportunity to choose differently. 147 00:15:27.260 --> 00:15:37.260 So, you know, someone who says we've determined that the price of wheat will always trade at one-fifth of the price of, you know, barley. 148 00:15:39.260 --> 00:15:45.260 All that takes is market participants making a new decision, and that relationship will be gone. 149 00:15:46.260 --> 00:15:49.260 So Mises says there are no constants in human action. 150 00:15:49.260 --> 00:15:57.160 Well, so this leaves us with a puzzle. All these investment banks and trading 151 00:15:57.160 --> 00:16:02.820 companies and so forth invest all this time and money into modeling. Now, are 152 00:16:02.820 --> 00:16:11.140 they just nuts? Well, you know, in at least the example of the firm we've been 153 00:16:11.140 --> 00:16:15.100 talking about, they clearly aren't nuts. They're doing something, they're getting 154 00:16:15.100 --> 00:16:27.100 So how can we square this use of mathematical modeling with the Austrian critique of mathematics in economics? 155 00:16:27.100 --> 00:16:43.100 So the conclusion I was finally led to by thinking about this was that mathematical models are useful for describing equilibrium-like phases of markets. 156 00:16:43.100 --> 00:16:45.100 I want to give you a little analogy. 157 00:16:45.100 --> 00:16:50.100 You have a batter in a baseball game and he swings at a pitch. 158 00:16:50.100 --> 00:16:55.100 Well, you can use a mathematical model to describe the path of the bat, 159 00:16:55.100 --> 00:17:01.100 given the initial force he applied to the bat and what's likely to happen to the ball and so forth. 160 00:17:01.100 --> 00:17:09.100 What the mathematical model is not going to get you is whether he's going to decide to check his swing. 161 00:17:09.100 --> 00:17:18.580 so you have phases in markets where the market will behave a good deal like a 162 00:17:18.580 --> 00:17:24.220 model now with the art with the merger deals that our traders are trading I 163 00:17:24.220 --> 00:17:29.940 said that they pretty much babysit the program through the day but what happens 164 00:17:29.940 --> 00:17:35.940 is they they watch carefully what's going on with the the stocks in the deal and 165 00:17:35.940 --> 00:17:42.940 And at some point, they see something going on that isn't going according to the model. 166 00:17:42.940 --> 00:17:45.940 At that point, they stop the program. 167 00:17:45.940 --> 00:17:51.940 And immediately they try to figure out what it is that went on. 168 00:17:51.940 --> 00:17:58.940 And it may be there's an announcement has come out, a major player has entered into the market for those stocks, 169 00:17:58.940 --> 00:18:00.940 could any of a number of things. 170 00:18:00.940 --> 00:18:09.540 What's happened is there's a new interpretation of the data in the market, and at that point they need to rethink the situation. 171 00:18:09.540 --> 00:18:16.440 They're again engaged in entrepreneurial activity, and they may be able to change their parameters, 172 00:18:16.440 --> 00:18:20.940 re-input them, and start it running again, and it may do just fine. 173 00:18:24.940 --> 00:18:29.940 One thing we can say about any sort of model in the financial markets 174 00:18:29.940 --> 00:18:37.500 is that it makes no sense for anyone who contends they have a model that always 175 00:18:37.500 --> 00:18:43.740 will work that they've arrived at the universal model. This can't possibly make 176 00:18:43.740 --> 00:18:51.340 sense. Fisher Black is a famous person in the finance markets and he was backing 177 00:18:51.340 --> 00:18:55.300 the capital asset pricing model putting forward his version of it and he 178 00:18:55.300 --> 00:19:09.300 He actually wanted to achieve general equilibrium and thought that by everyone following his model that the economy could achieve what Mises called the evenly rotating economy. 179 00:19:09.300 --> 00:19:16.300 Basically everything could settle down and conform to his beautiful mathematical model of what the economy should be like. 180 00:19:16.300 --> 00:19:22.300 But once you look at the factor of human action, you see this doesn't make any sense. 181 00:19:22.300 --> 00:19:27.100 No one's profiting anymore. Why? Why are they paying attention to the market? 182 00:19:28.220 --> 00:19:34.380 In fact, the market will get wildly out of equilibrium with everyone following a model because 183 00:19:35.580 --> 00:19:41.500 there's nothing, there's no reason to pay any attention to it. You also have the paradox that 184 00:19:41.500 --> 00:19:49.020 if everyone's following the same model, when that model generates a buy signal, well, everyone's 185 00:19:49.020 --> 00:20:03.020 Who's going to buy? From who? Who's selling to them? There's no one on the other side, so the idea of a universal model or a model that's always correct is nonsense. 186 00:20:03.020 --> 00:20:16.020 What you have is Terry Narden, who's a political philosopher, gave me, I heard him at a conference and he said a phrase that sort of crystallized my thinking on this for me. 187 00:20:16.020 --> 00:20:26.020 He said mathematical models in the social sciences are disguised descriptions of a practice. 188 00:20:26.020 --> 00:20:36.020 What that means is you have certain institutional structures, certain common interpretations, 189 00:20:36.020 --> 00:20:42.020 certain traditions, practices that people are employing. 190 00:20:42.020 --> 00:20:53.020 And while those practices and interpretations are in place, you'll get a regularity in that area of society. 191 00:20:53.020 --> 00:21:00.020 And that regularity, you may be able to generate a disguised description of it in a mathematical model. 192 00:21:00.020 --> 00:21:08.020 But that will hold only as long as those interpretations, those practices and customs hold as well. 193 00:21:08.020 --> 00:21:20.460 Karen Vaughan makes a very similar point. She says, 194 00:21:20.460 --> 00:21:25.140 in the case of action without significant reinterpretation, we try to explain a set 195 00:21:25.140 --> 00:21:29.480 of choices and their consequences within an established culture and an established market, 196 00:21:29.480 --> 00:21:35.060 within a given set of institutions. Because there are established institutional parameters, 197 00:21:35.060 --> 00:21:40.980 parameters, we can make informed theoretical predictions about the outcome of any action. 198 00:21:40.980 --> 00:21:46.360 In the second case, where new interpretations are being formulated, where there's innovation, 199 00:21:46.360 --> 00:21:51.020 we are asking questions about the process of market creation and institutional change 200 00:21:51.020 --> 00:21:56.300 brought about by the discovery of new knowledge or the perception of previously unimagined 201 00:21:56.300 --> 00:21:57.700 opportunities. 202 00:21:57.700 --> 00:22:03.740 With changing institutional parameters, we can predict very little even in principle 203 00:22:03.740 --> 00:22:08.740 Since we cannot know in advance what is going to be learned or perceived. 204 00:22:11.420 --> 00:22:18.180 So, if you're looking at employing models as an aid to investing, 205 00:22:18.860 --> 00:22:24.860 what can you take out of this insight? 206 00:22:26.540 --> 00:22:31.140 One thing is that modeling doesn't eliminate entrepreneurship. 207 00:22:31.140 --> 00:22:39.140 The people who are creating the models at my company are constantly innovating with their modeling. 208 00:22:39.140 --> 00:22:48.140 They're constantly making entrepreneurial judgments, and they're constantly ready to stop the model and make a new entrepreneurial judgment. 209 00:22:48.140 --> 00:22:52.140 At any point, the market data seems to call for that. 210 00:22:52.140 --> 00:22:58.140 Mises says, like every acting man, the entrepreneur is always a speculator. 211 00:22:58.140 --> 00:23:03.540 He deals with the uncertain conditions of the future. His success or failure 212 00:23:03.540 --> 00:23:07.980 depends on the correctness of his anticipation of uncertain events. If he 213 00:23:07.980 --> 00:23:16.120 fails in his understanding of things to come, he is doomed. The only 214 00:23:16.120 --> 00:23:19.860 source from which an entrepreneur's profits stem is his ability to anticipate 215 00:23:19.860 --> 00:23:25.580 better than other people the future demand of consumers. If everybody is 216 00:23:25.580 --> 00:23:29.580 If it is correct in anticipating the future state of the market of a certain commodity, 217 00:23:29.580 --> 00:23:33.580 its price and the prices of the complementary factors of production concerned 218 00:23:33.580 --> 00:23:37.580 would already be adjusted to that future state. 219 00:23:37.580 --> 00:23:42.580 Neither profit nor loss can emerge for those embarking upon this line of business. 220 00:23:42.580 --> 00:23:47.580 So that leads us to another consideration of modeling. 221 00:23:47.580 --> 00:23:52.580 As I said before, a model that everyone's using or everyone knows about 222 00:23:52.580 --> 00:23:55.820 is extremely unlikely to be successful. 223 00:23:55.820 --> 00:23:58.140 The interpretation is already out there. 224 00:23:58.140 --> 00:24:01.060 The price will already have adjusted. 225 00:24:01.060 --> 00:24:04.400 Now, there are a couple of common exceptions brought up, 226 00:24:04.400 --> 00:24:07.260 the dogs of the dial, the January effect. 227 00:24:08.740 --> 00:24:10.500 I'm no student of those. 228 00:24:10.500 --> 00:24:12.460 They're puzzling to an economist 229 00:24:12.460 --> 00:24:16.320 because if they really work and they always produce profit, 230 00:24:16.320 --> 00:24:20.180 why hasn't everyone piled in and eliminated that profit? 231 00:24:20.180 --> 00:24:25.180 As I said, I'm no student of those particular theories of trading. 232 00:24:25.180 --> 00:24:29.180 Another lesson is you have to constantly watch, 233 00:24:29.180 --> 00:24:35.180 if you're capturing a pattern of social practice in your model, 234 00:24:35.180 --> 00:24:41.180 you constantly have to watch for that pattern dissipating because it will. 235 00:24:41.180 --> 00:24:46.180 As I said, these traders and the modelers at my company are, 236 00:24:46.180 --> 00:24:54.180 are, while they are still making money with model A, they're working extremely hard coming up with model B. 237 00:24:54.180 --> 00:25:01.180 They never stop doing that. They never conclude that we've got the model and this is it. 238 00:25:01.180 --> 00:25:08.180 The traders explicitly say, no, you know, the profits from that will go away after a time. 239 00:25:08.180 --> 00:25:14.180 Market conditions change or other people come in and pick up on the pattern, 240 00:25:14.180 --> 00:25:18.380 because whatever pattern you saw you're not the only one who can see that and 241 00:25:18.380 --> 00:25:23.820 they'll gradually take part of those profits for themselves until the profits 242 00:25:23.820 --> 00:25:33.680 are competed away. As I said I would say don't trust anyone including yourself who 243 00:25:33.680 --> 00:25:40.540 thinks they've got a universal model for trading. A universal model implies that 244 00:25:40.540 --> 00:25:47.220 we're going to wind down to general equilibrium, to the evenly rotating economy and that state 245 00:25:47.220 --> 00:25:52.740 of affairs is logically impossible. Mises says there's nothing driving it anymore, there's 246 00:25:52.740 --> 00:26:02.820 no human action left. And as I said, you also find that if such a model were true, then 247 00:26:02.820 --> 00:26:07.300 you get the ridiculous state where everyone in the market is buying and selling at the 248 00:26:07.300 --> 00:26:13.600 the same time. The market is driven by differences in valuation and a market 249 00:26:13.600 --> 00:26:21.140 where everyone values everything the same is an impossibility. Okay, that's 250 00:26:21.140 --> 00:26:27.460 it. Hopefully something you can take out of that. Thank you.