Saturday, August 08, 2009

The ears have walls

William Easterly has this hilarious and poignant response to Queen Elizabeth's question about why economists did not predict the current economic problems. Your majesty, think about efficient markets. But can he explain it to Prince Charles?

Jason Zweig writes that "Data Mining Isn't a Good Bet For Stock Market Predictions" in today's WSJ. Also must-reading for the Queen. This one is also fun to read. He finds this in Mark Leinweber's Nerds on Wall Street:

Mr. Leinweber got so frustrated by "irresponsible" data mining that he decided to satirize it. After casting about to find a statistic so absurd that no sensible person could possibly believe it could forecast U.S. stock prices, Mr. Leinweber settled on annual butter production in Bangladesh. Over an 13-year period, he found, this statistic "explained" 75% of the variation in the annual returns of the Standard & Poor's 500-stock index.

By tossing in U.S. cheese production and the total population of sheep in both Bangladesh and the U.S., Mr. Leinweber was able to "predict" past U.S. stock returns with 99% accuracy.