Wall Street vs Chimps

A friend sent me an interesting article debunking the widely-promulgated myth that traders are especially gifted creatures. Simply, other businesses make much more efficient returns on shareholder equity. Of the top ten DJIA stocks ranked by return-on-equity, only one — American Express — is in the sector of financial services:

But actually, the rabbit hole goes a little deeper.

From the Daily Mail:

They are paid a fortune for their ability to make complex decisions about where to invest millions of pounds every single day.

But perhaps the job of an investment banker is not quite as difficult as it might seem.

A chimpanzee in Russia has out-performed 94 per cent of the country’s investment funds with her portfolio growing by three times in the last year.

Moscow TV reported how circus chimp Lusha chose eight companies from a possible 30 to invest her one million roubles – around £21,000.

I think this brings us to a (rather obvious) hidden truth.

Human beings are generally very good — vastly better than any chimpanzee — at creating value, producing things, bringing ideas to life. That’s why the most efficient companies on the DJIA — even over long periods — are all industrials.

Human beings are generally very bad — no better than any random stochastic process, like a chimpanzee throwing darts — at predicting the future in non-linear domains like currency rates and stock prices.

The fact that our predictive industries keep requiring taxpayer bailouts seems to confirm this.


Market Massacre

Just yesterday, this publication concluded:

The key theme [in identifying contemporary economic problems and solutions] is that these are structural and systemic failures, and not ones that can be addressed by panicking and “saving the system”. No matter how much money we inject into markets, unless bad ideas are allowed to fail, and good ones to prosper, unless bad investments result in losses, and good ones in gains, unless bad decisions result in failure, and good ones in reward, then all of that money is wasted. If anything, we need bad systems to break. We should take the consequences, and start rebuilding more robust systems.

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