Re: General Thery seminar

[paul davidson <pdavidson@xxxxxxx>]

At 03:24 PM 01/31/2000 -0500, Barkley wrote:
> Ronald,
>       Guess I don't find your "true" versus "false"
> traders story too appealing.  Using these two
> kinds of agents, how do you get a bubble?  Is
> it a particular large positive exogenous shock
> pushing both kinds of traders into buying?  I
> don't get it, I'm afraid.


All you need is some event that moves significant numbers from the bull to
the bear position AND then  the resulting price movement exacerbates the
swing rather than inducing a reverse swing as required by my point (2)
where a small upward change in market price moves a significant number from
the bull to the bear position  while a small movement downward moves a
significant number from the bear to the bull position.


>        The fundamentalist/chartist distinction, for all
> its problems, does give us a mechanism for
> dynamics.  Given a perceived fundamental, let it
> be the average opinion of the "well-informed"
> fundamentalist traders, an arbitrarily defined group
> perhaps (and certainly a Keynesian beauty contest
> story); then one can predict behavior of agents.  One
> can easily see fundamentalists and chartists doing
> different things in different situations (fundamentalists
> selling when price is far aboved the "perceived fundamantal"
> while chartists keep buying if price is moving up fast enough).
> This allows for an understanding of market dynamics with
> different ratios of the kinds of traders.


Now I suspect what you are driving at, Barkley is that chartists are
looking for joining momentum movements and therefore violating my point (2)
above -- while fundamentalists believe in the immutability of the
fundamentals and hence follow the strategy suggested in (2) above. The
problem with your catagorization is that it presumes, without proof, that
fundamentalists never start the sudden price movement that creates the
bubble for example because they "know" that fundamentals do NOT change.

If my interpretation is a reasonable characterization of your position then
you hve implicitly bought the classical position that all speculation is
stabilizing (and in so doing you have conflated speculation with
arbitrage).  Remember in the classical theory "knowledgable" traders know
the fundamentals -- it is the fools and knaves from Preoria who think they
can beat the efficient market and thereby create "white noise"
perturbations. It is the noise traders who create the bubbles.  (Are you
conflating chartists with noise traders?)


>         The literature on this is growing rapidly, but the
> general perception that an increase in the percent of
> traders following chartist strategies destabilizes markets
> and complicates dynamics rather neatly holds (I also
> recognize that there are other traders who are not so
> neatly categorized, complicated program traders working
> for Henry and his competitors; the behavior of whom is
> neither clearly stabilizing or destabilizing, and may in fact
> be locally stabilizing but potentially globally destabilizing
> as the LCTM outcome and the 1987 crash all may show).


The trouble Dear Barkley is that too many  economists -- especially
orthodox ones-- rush to print without either studying the history of
thought ("those who do not study history tend to repeat its errors") or
thinking out the logical consequences of their ad hoc constraints,
concepts, etc. A growing literature does not impress me-- especially when
its is growing literature of logical garbage.  But then call me old-fashioned!!

Paul