I still remember the moment I realized this. It was on the first day of my first class in Economics 101, when the professor began by telling us that economics was a science built upon the assumption that people are rational actors. I thought about all the people I'd ever known, and all the deeply irrational things I'd seen them do, and got the sinking feeling that I had committed myself to studying a field of thought that had chosen the wrong rock upon which to build its church.
You may have taken a statement made in jest literally. Homo economicus is a known fiction. Just as frictionless, airless physics are a known fiction. They're useful, however, for (a) defining a limit or ideal, (b) pedagogical purposes and (c) starting to think about a problem.
Microeconomics makes falsifiable predictions which can be repeated in experiment. (I'll go ahead and quibble over whether macroeconomics is a science. It's closer to an art, like politics. A field with its own rules and lessons worth learning, but without the capacity to experiment and make falsifiable predictions.)
On the other hand, economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances.
If by "very narrow circumstances" you mean setting pricing, organizing distribution, predicting the effects of price increases and decreases, determining capital costs, making portfolios, and a whole bunch of other stuff that microeconomics makes precise and in a wide variety of circumstances predictably-correct predictions, sure. There is no economics on the Sun's surface.
It's not billiard physics to general relativity, it's billiard physics to fluid dynamics and predicting the exact route of a stick through a set of rapids.
In economics our biggest complaints are around failure to determine that we're near a singularity and failure to predict behaviour through singularities (in a signal processing sense). It's understandable, as we all strongly care about the path of the stick, yet still unreasonable.
Macro is a decent enough tool most of the time, as are traditional fluid mechanics approaches. What we don't have are ultra precise CFD tools but in our arguments we act like we should/do. Sometimes traders think that they do have a great CFD solution and that's how we get LTCM crashes!
Or to maybe to a more human point, we can carry humans around on airplanes just fine, but don't know how to carry a payload of a nation of humans on a stable and healthy economic vehicle.
So if you want to have some sort of basic theory, any theory at all that really could work with such subjects, you gotta step waaaay back. The rational actor that actually "works" to build a scientific theory is such a general concept that it has literally zero predictive value. It states that actors make consistent choices, but only for identical choice situations. Thus, even if a microsecond passes, we are not in the same choice situation and all sort of rationality is out of the window.
An actor who chooses chocolate first, and then chooses something else the next second while throwing away the chocolate is can still be rational, it's only about the counterfactual of the first choice situation. Yet, one was able to show that this sort of very general rationality is a necessary condition to writing a formal model of human behavior, in other words the homo economicus is just answering the question as to what ground rules we need to model human behavior in the first place. It is truly an immaterial, philosophical object that is used in all science dealing with human behavior.
It's more to the credit of economists that they actually wrote this out axiomatically instead of hiding it in implicit discussion.
Then, economists went and tried to write falsifyable theories based on data and observation. This has been done with more or less success, but let's not forget that economic science still replicates much, much better than something like Psychology or Sociology, also concerned with human behavior.
By the way, applying physical approaches to economics is called econophysics and is a thing that exists. It's not really a thing that is successful, cause if you treat humans as mindless particles who are just behaving according to some ruleset, you are working with hyper-hyper rational actors. But it exists.
Can you give an example?
In terms of micro, yes there are pretty consistent theories as to why and how people use money. Probably the most relevant application thereof are in the microeconomics of banking and in so called microstructure models in finance.
In terms of macro, there is of course also a lot of monetary theory as to why people use money in a certain way.
What does not yet exist is a unified theory linking micro behavior to all aggregates. Such models typically rely on some sort of representative agent, which is known and recognized to be deeply problematic in scientific terms of aggregation. Other approaches exist, of course, such as agent based models. But there is no "theory of everything" yet.
Can economics give rationales? Yes. Peek into any course on the theory of money.
But reasoning from micro behavior to aggregates is difficult in social science. We are currently in the process of figuring out better theories of aggregation, but doing so requires using game theory and decision theory in fully interdependent (so for example networked) contexts trough dynamics, so this as of yet also requires a lot of methodological (read: mathematical) machinery that is not yet developed.
Inverting the question does not obviate the answer to what I asked you. Moreover, as stated your rebuttal question is underspecified: what do you mean by the "dynamics of money" and "stable foundation"? Can I trivially answer this by talking about the relationship between credit and debts, or are you looking for something more specific? You responded to my (very precise and specific) question with a vague, orthogonal dismissal of the entire field.
Why don't you tell me about the "mathiness" in some peer-reviewed economic paper (preferably in a tier 1 journal) that you perceive to only be correlated with real world conditions in "very narrow circumstances"?
That's like saying, well I was reading a programming book about a Ruby and then I laugh at the professor threw the book in his face and said 'One can never make an Operating system with this'.
Honesty, if you truly believe that about economics then you simply have never spent time to actually learn and engage with a wide verity of economics that exists.
Instead, a more narrow view (partly due to difficulties of dealing with uncertainty, partly due to the context of preferences in a dynamic setting) required adding other behavioral theories which are now rightly considered mainstream in economics as well. All these non-rational actors are still rational in the general sense, in that they make choices based on preferences at some point in time.
There is, by the way, no other science dealing with human behavior that does not assume rationality. In business, this is called "bounded rationality" after Simon, but nowadays is basically and excuse to use rational actors even though we know "they ain't". All sociological actors are rational as well, even though you will rarely find a sociologist write this as a statement. Still, choices are made as responses to the environment of social forces.
Quite generally, it would be impossible to theorize about human behavior if it were irrational. That, in the general sense, would mean that it is not consistent and not predictable and thereby inherently not accessible to science.
What you econ Professor told you is basically correct, but the correct formulation of this you will probably see the first time when you take a course on decision theory or graduate microeconomics.
Too many critics focus on pure dollar optimizing rather than value optimizing. We all have different value maximization functions - if you understand that dollars are just one type of value so called irrational behaviour is coldly rational. Dynamic time preferences for money are accepted but dynamic preference functions for other things (status, sense of self, stress level..) are ignored.
Passive investing works thanks to active investing. Funny huh?
IT would not work. Not poorly, it just wouldn't work at all. This tells me that there is a balance on how much active/passive investment can there be, and at some point they will be balance by some criteria.
If the population grows 3%, we have to produce roughly 3% more, so revenues go up roughly 3%, number of employed goes up roughly 3%, so the economy grows 3%.
If I invent a steel manufacturing process that makes steel 3% cheaper, expenses go down 3%, profits go up, supply goes up, prices go down, the economy grows.
If all you do is passively invest, then over large periods of time you should on average see returns of, roughly, population growth + innovation. Even if everyone is passively investing, it's the same thing. If you actively invest, but still invest in the whole market (as any diversified investor does), you get the same thing, minus ~1% towards. If everyone was actively investing before, and the market grew ~8% per year, and now they passively invested, why would the market not gain the same?
Plus, it's not like passive investing causes securities to never be traded, when I buy into a mutual fund I'm buying stock from someone. That someone is probably retiring and selling their securities.
Lastly, most "active traders" just buy a bunch of Blackrock/Vanguard/SPDR index funds anyway and call it a diversified portfolio that only they could deliver.
In reality, trying to time the market rarely works out, and when it does it can often be attributed to luck. In general, just investing every month is the best strategy.
Why the delay?
This was a decision your 401(k) provider made. The proper person to gripe to is whomever in HR chose a cheap provider. (They make up for reduced administrative costs by (a) being less efficient and (b) capturing float.)
"When selling a mutual fund to purchase a fund in a different family, you are selling the mutual fund you own and using the proceeds to purchase another fund in a different fund family. Since you are performing a cross family trade, the settlement date for the sale will differ from the settlement date for the purchase. Typically, cross family trades execute over two business days."
No, but they have different tiers of service. In my account, for example, I can sell and purchase intraday. They do what they do for my personal account, which is credit the cash intraday. TL; DR This is not a legal, but contractual, requirement.
https://www.ally.com/do-it-right/investing/what-are-unsettle...
1. Market makers don't make investment decisions or hold positions. They facilitate trading as counterparties to investing parties, but do not drive prices themselves.
2. Market makers would make a terribly poor shadowy cabal, because the amount of capital they collectively manage is in the high single to low double digit billions. Mutual funds, hedge funds and private equity account for trillions.
This selection bias works somewhat like the old sports betting scam:
1. You get 16,000 email addresses from people who want to receive your expert tips to predict NFL games. You send each of them your pick for the Monday Night Football game. You tell 8,000 of them that the home team beats the spread and the other 8,000 that the away team beats the spread. Be sure and include complicated rationales that will seem prophetic after the fact.
2. Of the 8,000 who received the "correct" tip, you send 4,000 of them one pick for Thursday Night Football and 4,000 of them the opposite.
3. Repeat for the Sunday Night game.
4. You now have 2,000 people who think that you can accurately predict who's going to win a football game, because you've done so for three nationally broadcast games in a row, and the odds of that are astronomical! (I mean, they're 1 in 8, but the kind of people who sign up for spammy sports betting tip newsletters aren't necessarily that sharp). Con 10% of them into paying you $50 for your expert tips for the next Monday Night Football game and you've made $10,000 out of 16,000 email addresses and a week's worth of making up shit about football.
(the exception being, with mutual funds, it's the funds themselves that are dropped instead of the poor saps who invested in them).
...
On the one hand, when it comes to active vs. passive investing, you have the Bogleheads and the hardcore efficient-market-hypothesis types who will tell you that every possible rationale you could ever have for ever making an active investment decision is already priced into the market. On the other hand, Warren Buffett spent virtually his entire life overperforming the market. How to reconcile this?
Actually, I think it's entirely possible for active investment to beat the market, but with a LOT of caveats:
1. The market isn't 100% efficient, which is logically equivalent to saying that it's possible for active investment to beat the market. This seems pretty obvious when you put it this way--100% efficiency is fucking magical, it's not a realistic expectation to have of the world--but how efficient is it? 95%? At that point, you're spending a ton of time and effort finding a market opportunity where you can realize a return of $100 instead of $95. That's a lot of work, and if you're smart and diligent enough to make your marginal $5 that way, you're probably smart and diligent enough to make $10 doing real work instead.
2. So let's say you follow your passions, and active investing is it. You work long and hard to find $5 opportunity after $5 opportunity, and nothing else matters to you other than your loved ones, your weekly bridge match, and advocating for tax reform because you think it's ridiculous how low your taxes are. See where I'm going with this? If active investing is hard enough, and lucrative enough, you're not going to go around asking bored salary drones to let you invest their retirement money in exchange for commissions and fees. That's ridiculous. If you know how to beat the market, beat it yourself and keep all the money. In other words, active investing only works if you, personally, are the active investor. It's not a justification for buying mutual funds.
3. So let's imagine that you are literally the single most successful person in the world at active investing. You're a household name, a genius, an "Oracle", you go to the White House and play bridge with Bill Gates and you're in the top ten billionaire list...
...wait, did I say "Bill Gates"? Take another look at that list, while you're at it. If you're really smart, and diligent, and ambitious, and want to get really really rich by working really really hard at it, it turns out actually creating new businesses works out a lot more often than investing in existing ones. Active investing is exactly the kind of field where you would expect massively outsized returns, and yet, once you eliminate out the heirs, heiresses, and developing country oligarchs who ended up with a controlling stake in newly privatized industries through Totally Not Corrupt Processes™, you're a lot more likely to make a huge fortune by getting 2 billion people to use your ad-supported website, selling cheap flat-pack furniture, selling database software to large companies, selling running shoes, or literally doing any other kind of real work.
So, yeah. Active investing can work out for you, but there's no free lunch, and if you have the money to spare and you're willing to put in the work, you might be better off doing something like buying and flipping houses. Sure, you'll spend frightening amounts of spare time covered with sawdust and choking on mold spores, but at least you'll expect that going in.
First, because economics is the study of exchange, which means the exchange between a human being and another one. Understanding human behavior in its totality is like trying to understand our brains or our own consciousness. It suffers from a halting-problem level dilemma.
Second, because the study of economy tends to be about its application, it will always fail to obtain perfectly predictable results because humans are not perfectly predictable. And humans fight back. It is aking to believing you found the perfect method of making someone fall in love with you: as desirable as it is preposterous to believe you can achieve it.
Whatever model of economics you have, if it has room for 1% of human behavior, rest assured that its enough to take it down.
China’s 2015 GDP Was Exaggerated By Fake Data, Analysis Shows
https://www.bloomberg.com/news/articles/2018-02-01/china-s-2...
China's average GDP growth has been roughly 30% less than reported, based on the measures of its changes in national lighting
https://www.investors.com/politics/editorials/new-study-shin...
Another Chinese city admits 'fake' economic data
https://www.reuters.com/article/us-china-economy-data/anothe...
And it makes things more complicated when people start messing around with how they measure things, and messing with formulas. Numbers like China which are inaccurate. Inflation number which are messed with by FEDs. IMF prediction model which has been wrong every time for years and it seems its only job is to please or more accurately manipulate the market mindset.