The old rule on Wall Street has always and ever been “Keep the economists as far away from the trading desk as possible.”
It was always laughable to me when I’d see guys buying and selling based on Roubini’s economic “alerts” or some other ass-clown’s macro newsletter. Because it doesn’t matter how brilliant an economist is, in the end he cannot model human behavior or predict sentiment in a market being acted upon by millions of individual agents. There is no numerical input for emotion.
There is another key difference between traders and economists that is worth pointing out, this excellent passage from a story at The Economist on why so many traders have bet against QE and lost:
Traders and economists both spend their days studying markets, yet I’m struck by how differently they approach the subject. Since traders profit from finding mispricings, they are biased to believe that prices are more often wrong than right. Fundamentals matter, but traders believe they are routinely overwhelmed by psychology, liquidity and other non fundamental factors.
Economists, by contrast, grow up believing prices are usually right. The intersection of supply and demand curves explains in elegant, intuitive and internally consistent fashion how each individual buyer and seller can have a different idea of what a price should be, yet their interactions collectively yield a single, objectively correct price. Economists don’t dispute the role of psychology – they’ve handed out Nobel prizes for precisely that – but the organizing principle of their lives is that market prices are usually an unbiased distillation of fundamental determinants.
I’d say that’s as good an explanation as any…