Two big pieces of news for me today. This morning I got the first physical copy of my book Economics in Two Lessons.
Then, I got the news that, for the first time in my career, I’ve had an article accepted in Econometrica, the top theoretical journal in economics. It’s full of arcane maths, drawing heavily on the expertise of my co-author Ani Guerdjikova, but the key implication is simple. If people aren’t equally good at predicting movements in asset prices, restrictions on the set of assets available to them may improve economic welfare. This undermines the general presumption that financial deregulation will be beneficial.
All in all, a good day!
John Quiggin 
Congratulations Professor Quiggin.
You earned whatever honours come your way.
John: you say re the Econometrica article “but the key implication is simple. If people aren’t equally good at predicting movements in asset prices, restrictions on the set of assets available to them may improve economic welfare. This undermines the general presumption that financial deregulation will be beneficial.” Do you think that applies to investment decisions generally – ie to any form of spending? If not, what is so special about “assets”?
Congratulations John. Well deserved only partially covers it when you consider that you have been the best economist in Australia for so long.
What jackstrocci said +1.
And JQ, as per Robert Banks, would you please write an unambiguous – ala what is your definition of economic welfare in this instance as the term econimic welfare will trigger many discursive thoughts and opinions. Restrictions only at the level of central / banking / investor or down to personal?
A story and examples would be great.
And how will this apply to climate change, power generation, dynamics of market disruptions and potential private vs public restrictiins or control of asets and commons.
I hope also you consider a guest post by Ani Guerdjikova.
Congratulations John!
Conrats, Prof Quiggin.
Congratulations John, very well done.
” If people aren’t equally good at predicting movements in asset prices, restrictions on the set of assets available to them may improve economic welfare. This undermines the general presumption that financial deregulation will be beneficial.”
Is the intuition here that if some traders have inside information about price behavior of certain securities (e.g. derivatives) that they can dud those who do not? Hence restricting access to such securities for non-knowledgeable participants will improve welfare. This seems a potentially contentious view since it is difficult to think of asset markets where this type of differential access to information does not arise. For example it probably arises in equity markets.
BTW in the actual paper do you point out the intuition of your result?
“If people aren’t equally good at predicting movements in asset prices, restrictions on the set of assets available to them may improve economic welfare. This undermines the general presumption that financial deregulation will be beneficial.”
No doubt, but isn’t this just the (63 years old) theory of the second best applied to financial markets?
@HarryClarke
It sounds like it’s not inside information, but that some people are going to have correct guesses about which way asset prices are going to go, and some will have incorrect guesses.
But what does mean in practice? That we shouldn’t let people invest in any assets whose price might go up or down? That at only leaves cash, and even cash is subject to inflation risk.
Congratulations! That’s awesome news. And also a great interpretation of the cover of the book.
Congratulations, it’s a real achievement in the current paradigm. However, I remain genuinely concerned that there are serious problems in the current paradigm which remain unaddressed by “orthodox economics” if I may use that term. Indeed, orthodox economics is theoretically and empirically unfitted to meet these challenges.
Congrats, Professor.
Congratulations, Professor Quiggin.
I join those who express their congratulations to the Econometrica article and I look forward to reading it.
Congrats on the book. I have ordered a copy, but from an independent bookseller, so I don’t expect it to come for awhile. I refuse to order books from Amazon or its subsidiaries because of their abhorrent labour practices and taxation avoidance strategies. I loved Zombie Economics. Have you noticed that most popular economics books are heterodox? Not many of them are neoliberal diatribes. I guess most mainstream economics textbooks fall into this category. The only economics text book I own is by Hugh Stretton, which you won’t find in any economics course. I think Krugman’s book would be good, but, again, I don’t think you’ll find this on top many univesity syllabi (we always hear howls from the right that humanities and social science departments are stacked with “cultural marxists”—I have no idea what that means—but how many of the left criticise economics and business faculties for being the equivalent of right wing madrasses).
$49.95 in the bookshops, $31.15 from Amazon.
Maybe there needs to be a third economics lesson on why Amazon is so much cheaper.
(But the kindle version is not much cheaper, $29.47.)
i’ll pay the diff.
my favourite bookshop is worth it.
i can order stuff (no i don’t wan’t it in the next three seconds)and they will hold it for me.
i can snoop and stickybeak as much as i want among all sorts of books i would otherwise never see.
i can park myself on a seat in the shop.
the staff will navigate the cybermaze and give me an answer on any book just about anywhere.
and
and
and.
looking forward to reading and hopefully understanding at least some of your work,
congratulations JQ.
Maybe the people who are “not equally good” at predicting asset prices fluctuations, could simply get advice on how to invest from those who are ‘equally’ good at predicting these movements? How does one tell (and how) how good one is at predicting these movements (since they are random). Or is this a purely theoretical work (assuming some set of people are better at predicting these movements, we let only this set invest). Would this have any effect on the efficient market hypothesis?
If I make a poor investment, I am worse off. But the money I put into it must have ended up in someone else’s pocket, so they are better off. On avegage, there is no change in ‘welfare’.
Ale, That’s correct. The poorly informed can buy stock in no-load mutual funds or ETFs and outperform the smartypants active traders. It is a pity John doesn’t set out the intuition of this result. My guess is its scope is narrower than we are assuming.
AleD, Econometrica is, as JQ wrote, the top journal in economic theory (and if not classified as the top during a time interval, then among the top three). To get a theory paper in this journal there has to be a new result, which is judged to be of significance at the time it is submitted.
Your guess that the information asymmetry (relative ability to predict) can be overcome by the relative poor ability predictor getting advice is an example of what some people might call arm chair theorising because: a) How would a relative poor ability predictor decide on whom to ask for advice? b) Why would an adviser provide the “relevant” information free of charge? c) How do you exclude the possibility that advisers don’t exploit the information asymmetry by deliberately providing poor information? And so forth.
I am afraid, reading the paper first is a necessary condition for asking questions.
I disagree Ernestine. The intuition behind complicated results can be discussed. I tried a working paper version of this paper and, yes, it is well beyond my capabilities. But the intuitive conclusion John claims is interesting and is worthy of discussion. To take another example: You don’t need to understand the Kakutani fixed point theorem to appreciate the intuitive idea of a competitive market clearing equilibrium.
Ernestine Gross,
I appreciate your comment. Mine were genuine questions, after trying to figure out/guess what this article was about (as some others have done), simply because I’d like to know more (I checked and know that the paper is not available so I can’t read it for that reason).
That it has been accepted in this top journal is great, and I don’t doubt the authors’ skills (I don’t think they need my congratulations) .
However, the idea being new and published in this journal is no great guarantee to me (of anything): Many papers have already been published in this journal. Economics as far as I can tell is not an ‘exact’ science (despite its heavy use of mathematics).
So I guess we’ll have to wait for the paper to become available (since the authors are clearly not providing information on it for now).
Ernestine,
Some questions come to mind for your a,b,c (granted it is at best armchair theorising).
(a) How would two economists decide that someone who is/is not a poor/good predictor? How would anyone in practice?
(b) Maybe some of these don’t have their own funds to invest, so they offer advice in exchange for a percentage of the profit.
(c) If they provide poor information, it will result in them being re-assigned to the group in (a). This will also filter out some investors.
I guess this is more or less what is already happening. I wondered if the current good ability predictors (those who can or claim to use powerful algorithms for example; or some famous successful investors, who perhaps were simply lucky) are good because they take the money away from the poor ability predictors (so an invester is always in one of the categories). And as long as we can entice new poor ability predictors to invest (and we can, for example some proportion of those whose superannuation funds are invested in various securities will lose money), or to become poor ability predictors by investing, then the financial sector people will always end up with some money in their pockets. And they are not going to give up on this opportunity either.
And all this must have been some brilliant economist’s idea in the first place.
Harry and AleD, may I propose we get back to this topic after the paper is published and we have read it.
In case we don’t meet on this blog before the end of this week, I wish you and all readers a good Easter break.
Ernestine,
Sure. Look forward to it. Best wishes to you too, and everyone else.
Congrats Q.
For my part I only became interested in economics when I had to ,when I realised it was being used as a weapon .The field is so heavily ideological ,not a pure science at all. Non economic type starting assumptions differ wildly amongst rivals in the field.
Congrats. Aside: do your chances of getting a paper accepted by a high-status journal depend only on the perceived merits of the piece – advanced mathematics, relevance to ongoing controversies, occasionally relevance to policy – or also on the status and notoriety of the authors? Has any such journal tried anonymising the authors for selection and peer review? It would appear simple to carry out a random trial using alternating issues of the same journal. I understand there are documented issues of gender bias in academic publishing, but the fairness problem is wider than that.
To answer James, it varies. Some top journals – particularly those of the AEA (American Economic Association) have a name for allowing – ahem – sociological factors to enter their decision process. As a consequence of the Reinhart and Rogoff scandal of a few years ago, where a very influential (on policy) but extraordinarily shoddy article appeared, these journals have suffered reputational damage. But most of the top ones do proper blind selection and review – certainly Econometrica would.
The usual criticism of most such journals’ selection process is that they put too much weight on mathematical innovation and not enough on policy relevance, but John’s paper has plenty of obvious policy relevance (I assume John was inspired by debates over superannuation “choice”).
Of course in very specialised fields blind selection and review is impossible, because there are too few people in the field for a submitted paper to remain blind. But I don’t think this applies to John’s, because decision theory is simply not that specialised.