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Ignoring Occam's Razor (Or Why It's Not Different This Time)

Tyler Durden's picture




 

Excerpted from John Hussman's Weekly Market Comment,

Occam’s razor is a principle that states that among various hypotheses that might be used to explain a set of observations, the hypothesis – consistent with the evidence – that relies on the smallest number of assumptions is generally preferred. Essentially, the razor shaves away what is unnecessary and retains the most compact explanation that is consistent with the data.

...

When we observe the increasingly tortured arguments that “this time is different,” we see investors discarding straightforward explanations that are fully consistent with the evidence and opting instead for the aliens-from-Xenon theory.

As much as investors seem to want to believe that aliens from Xenon have brought some brave new world, our valuation approach is consistent with a century of market history and has not missed a beat even in recent market cycles. We continue to view long-term prospects for the stock market as dismal at present valuations.

...

We increasingly see investors believing that history is no longer informative, and that the Federal Reserve has finally discovered how to produce perpetually rising markets and can intervene without consequence to support the markets and the economy indefinitely. Maybe it’s no longer true that valuations are related to subsequent returns. Maybe, contrary to all historical experience, reliable measures of valuation that have had a 90% correlation with actual subsequent market returns can now remain at double their historical norms forever, thereby allowing capital gains to be unhindered by any future retreat in valuation multiples as fundamentals grow over time. It’s just that one must also rely on valuations never retreating, because even if earnings grow at 6% annually indefinitely, and the CAPE simply touches a historically-normal level of 16 even 20 years from today, the total return on stocks, including dividends, would still be expected to average only 5% annually over that horizon. That’s just arithmetic.

...

Meanwhile, nothing even in recent market cycles provides any support to the assumption of permanently elevated valuations. The only support for it is the desire of investors to avoid contemplating outcomes the same as the market suffered the last two times around. “This time is different” requires a lot of counterfactual assumptions. Occam’s razor would suggest a nice shave.

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Sat, 07/12/2014 - 15:13 | 4950423 TeamDepends
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Next haircut = scalping

Sat, 07/12/2014 - 16:57 | 4950695 Boris Alatovkrap
Boris Alatovkrap's picture

There is Occam's Razor with fanciful proclivity for parsimony, but there is also Boris' Razor which is "take careful of extra nipple when is shaving back".

Sat, 07/12/2014 - 18:03 | 4950836 Occams_Chainsaw
Occams_Chainsaw's picture

The chainsaw rules...

Sat, 07/12/2014 - 15:16 | 4950432 greatbeard
greatbeard's picture

>> Occam’s razor

For the life of me, and it's not for the lack of effort, I've never been able to get the gist of Occam's razor.  I'm going to read over Hussman's description as many times as I have to to get it, but that damn thing, fwer, just doens't jibe with me.

 

 

Sat, 07/12/2014 - 15:19 | 4950445 Thomas
Thomas's picture

Contrary to popular opinion, Occam's (Ockham's) razor does not say that the simplest explanation is the most likely. It suggests that you cannot justify invoking a more complex explanation based on the limited data. If you wish to do so, you gotta get some more data--hypothesis driven science. 

Sat, 07/12/2014 - 15:21 | 4950455 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

Not the simplest per se; the one with the fewest assumptions.

Sat, 07/12/2014 - 15:22 | 4950461 Thomas
Thomas's picture

Yes. In fact, given the choice of a (an) hypothesis or the alternatives, I will always go with the alternatives collectively because they are infinite.

Sat, 07/12/2014 - 15:31 | 4950494 ZerOhead
ZerOhead's picture

I'm going to pencil you in as a "CO2 alone drives the global climate" denier...

Sat, 07/12/2014 - 15:47 | 4950537 Thomas
Thomas's picture

Pencil me in as "there's a shitload of things that could cause it and we are not likely to really understand them until long after we are fucked or OK" believer.

Sat, 07/12/2014 - 17:01 | 4950706 Boris Alatovkrap
Boris Alatovkrap's picture

Corollary to Occam Razor is assume people are to be motivation by self interest. For example, Federal Reserve Bankster System is form by share ownership by certain bank and is not answer to Federal Government (ironic, neither is Federal Express) or private citizenry. So when Federal Reserve is making pronouncement, you must to assume all intention is interest of member bank, holder of share, and in whom interest is given on behalf thereof.

... but what is Boris know?!

Sat, 07/12/2014 - 21:00 | 4951221 Keyser
Keyser's picture

Parasites rarely care about the health of their hosts and will bleed them until death... One would think that even the central bankers would realize this, but alas, they either don't care if they collapse the system or they have lost control... 

Sun, 07/13/2014 - 15:30 | 4953065 Grouchy Marx
Grouchy Marx's picture

Occam said: "For nothing ought to be posited without a reason given,

and we can posit that Yellen is working in the collective best interest, inasmuch as she is a brilliant economist, and the market is reaching new highs.

See, even the razor has its limitations. 

Sat, 07/12/2014 - 16:11 | 4950595 pakled
pakled's picture

Interesting. So it's not just a version of 'it must fit on the back of a cocktail napkin' to be viable.

Sat, 07/12/2014 - 17:44 | 4950802 malek
malek's picture

Scale of those assumptions don't matter?

"There exists a god that created everything" is just one assumption...

Sat, 07/12/2014 - 15:23 | 4950466 Pheonyte
Pheonyte's picture

And contrary to that, Ockham's Razor actually states that entities ought not to be multiplied without necessity. It's a principle for doing metaphysics, not science.

Sat, 07/12/2014 - 18:31 | 4950906 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Ockham's razor is 'puzzle solving' and Thomas S. Kuhn characterizes

'puzzel solving' as being in the 'normal science' stage. Kuhn would not characterize 'Ockham's razor' as being merely a 'principle for doing metaphysics' as you state. Further, Thomas S. Kuhn is most often cited

by peer-review scientists when it comes to operational definitions of 'science' proper, Pheonyte.

OCCUPY HISTORIOGRAPHY - OCCUPY EMPIRICISM - OCCUPY EVERYTHING

Sun, 07/13/2014 - 15:14 | 4953038 Grouchy Marx
Grouchy Marx's picture

Greater application - it is a principle for general problem solving: go with the simplest and most likely solution unless it proves inadequate. 

Sat, 07/12/2014 - 15:20 | 4950453 Duffy Duck
Duffy Duck's picture

do not multiply entities needlessly...

 

it distills to the idea that the simplest explanation is the best.

 

It is not always the most accurate, though.

Sat, 07/12/2014 - 15:28 | 4950476 ebworthen
ebworthen's picture

You have a cookie jar with a heavy lid on your counter.  You leave for work and it has 10 chocolate chip cookies in it.  You come home and they are gone - though the lid is on the jar and a step stool pushed over to the counter under the jar.  You have a five year old son, you have a Labrador retriever.  The child says the dog ate them, and has chocolate around his mouth.  The dog is laying on the kitchen floor looking askance as the child points to it.

Financial Advisers, the MSM, .gov, and Dennis Gartman + Joe Lavorgna believe the child.

Occam's razor says the kid ate the cookies.

Sat, 07/12/2014 - 15:50 | 4950548 Thomas
Thomas's picture

Yes. You had that model locked up after the first sentence. It would be one of my laborador retrievers but the lid would have been smashed and the dogs would have shit-eating grins on their faces. The problem with the kid being the cause is that no kid could beat my labs to the cookies.

Sat, 07/12/2014 - 16:14 | 4950601 pakled
pakled's picture

"and the dogs would have shit-eating grins on their faces"

 

Or, laying on the kitchen floor looking askance from a sugar low?

Sat, 07/12/2014 - 23:15 | 4951485 Pool Shark
Pool Shark's picture

 

 

So,.. Janet Yellen believes Labradors can remove cookies from a jar and then replace the lid...

 

Sun, 07/13/2014 - 05:13 | 4951779 StychoKiller
StychoKiller's picture

Don't let yer dogz eat chocolate.

Sat, 07/12/2014 - 16:07 | 4950589 foxmuldar
foxmuldar's picture

For a moment I thought you were talking about Lois Lerners emails. 

Sat, 07/12/2014 - 18:53 | 4950959 Miffed Microbio...
Miffed Microbiologist's picture

You should try serving on a jury with a case as this. After my fourth time dealing with people who were unable or unwilling to accept logical inferences to facts presented, I have decided to fake my own death if summoned again.

On one jury, a witness claimed a car had flown " like in Dukes of Hazard". the other lawyer proved that this was physically impossible because it wasn't weighted properly to have done so. He use data from the scene and simple trigonometry to solidify his point. Well, 7 people believed the witness and not the science. Finally in exasperation I begged one to tell me why. " I didn't understand the explanation so I don't believe it" was the best I could get.

Miffed;-)

Sat, 07/12/2014 - 19:34 | 4951036 malek
malek's picture

If you made sure it ended as a mistrial, you won't be invited as juror quickly again.

Sat, 07/12/2014 - 20:42 | 4951077 Miffed Microbio...
Miffed Microbiologist's picture

You brought up a point I hadn't considered. On one trial I actually was hanging the jury. They all were going to vote not guilty because the case didn't have enough evidence. Three separate people saw and named the man running from the scene of the crime and he was found with the stolen property. I claimed he was guilty. The guy had done time in Donovan Prison and the dipshit accidentally robbed a guard of the prison who recognized him. Two other people in the apartment complex confirmed this.

I'm laying in bed fuming over it when Mr comments my jury deliberations seem to have been taking a bit longer then anticipated. I tell him I'm the sole hold out. Knowing I cannot discuss the case, he does suggest I examine my motives and results of my actions. I came to the conclusion my acquiescence would not release a dangerous criminal into the community ( at least with the data I had) and my stubborn determination to hold fast to the truth was futile. So I gnashed my teeth and relented.

Considering your comment, I probably should have hung the damn jury.

Miffed;-)

Sun, 07/13/2014 - 05:15 | 4951781 StychoKiller
StychoKiller's picture

Next time, Query the judge about jury-nullification, they'll be only too happy to get you dismissed!

Sat, 07/12/2014 - 16:37 | 4950652 besnook
besnook's picture

KISS. keep it simple stupid

Sat, 07/12/2014 - 18:04 | 4950837 29.5 hours
29.5 hours's picture

 

 

Don't confuse the modern interpretation of Occam's point of view with his own. I agree with the modern interpretation by Russell and Einstein. But Occam himself was a person, much like others now on ZH, who was trying to dodge official accusations of heresy. In his own defence, he said:

"For nothing ought to be posited without a reason given, unless it is self-evident (literally, known through itself) or known by experience or proved by the authority of Sacred Scripture. "

That point of view would be considered brave in any age.

 

 

 

 

Sat, 07/12/2014 - 15:20 | 4950440 Sudden Debt
Sudden Debt's picture

There is one reason why the market will keep going up...

I just don't believe that the fed will suddenly stop. Maybe officially yes... But behind the curtain? No.

This is a war kids, and the stakes are everything know to man.

Sat, 07/12/2014 - 15:41 | 4950523 ZerOhead
ZerOhead's picture

As the Fed overtly 'tapers' it will have it's back-up buyers in places like Belgium and elsewhere picking up the slack.

It's an "In God We Trust" faith based currency after all so loss of faith something they simply can't risk.

Sat, 07/12/2014 - 15:51 | 4950554 Sudden Debt
Sudden Debt's picture

Banks, funds, they're all from the same club so why even bother placing a country in it.
Over here in belgium nobody actually knows what's happening, all we know is that our debt is exploding again and there's a lot of talk about using "sleeping" accounts to fund the government.

Sat, 07/12/2014 - 15:42 | 4950525 seek
seek's picture

One look at Belgium bond purchases is all you need to know about the Fed "stopping."

Indeed if the Fed every really does stop, it will be immediately followed by massive accounting fraud at the banks, which will keep it going another few months, before the implosion takes place.

I keep wondering if the new found rein-in-the-fed talk out of congress isn't actually a cover. They pass the bill, Fed stops, system blows up (which it would do anyway) and they'll blame it on the fiscal conservatives and not the 100 years of Fed treachery.

Sat, 07/12/2014 - 16:30 | 4950637 BuddyEffed
BuddyEffed's picture

Stopping for them would be the financial equivalent of the tide going out so that we can see all who are swimming without a bathing suit and as WB intones on this, it can be a quite shocking event as so many are likely unsuited.  So if not out the front door, through the back door, underground, Belgium, etc. 

Sat, 07/12/2014 - 15:19 | 4950448 stinkhammer
stinkhammer's picture

End the f'ed

Sat, 07/12/2014 - 15:21 | 4950456 ebworthen
ebworthen's picture

Pretty sure Greenspan, Bernanke, and Yellen are aliens from Xenon.

Sat, 07/12/2014 - 15:30 | 4950490 TeamDepends
TeamDepends's picture

Xenon!!!!  Oh man, that is rich.  Spewed our ale all over the keyboard.  No, everyone knows they are from Planet Keynes.

Sat, 07/12/2014 - 15:25 | 4950459 Duffy Duck
Duffy Duck's picture

Duffy's vaccuum:

Do note cite Ockham's Razor needlessly.

 

So tokens of value exchange backed by nothing but faith are riskier than gold and silver, is that right?

 

The reliance on the past is strange...  past cycles?  What are we up like 12 trillion in FRN?  With fewer jobs relative to more unskilled immigrants and unfunded liabilities.  Reliance on the past for modeling is like reliance on how often it rained the past 10 Mondays to determine if it will rain next Monday.

Sat, 07/12/2014 - 15:47 | 4950540 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

William of Ockham [1280-1349] "nominalism is not of an extreme form;

rather it is a variety of conceptualism known as terminism. He regarded the universal as an intention of the mind; and held that the objects of science are propositions rather than things. Only the "term" as it exists in the mind has universality. Knowledge of individual things must be intuitive, and in understanding things one must not employ a plurality of concepts beyond necessity. This is "Ockham's Razor," which cuts off superfluous entities."

OCCUPY THE BRAIN - OCCUPY SENSATION & PERCEPTION - OCCUPY EVERYTHING including EXPERIMENTAL PSYCHOLOGY

Sat, 07/12/2014 - 16:17 | 4950614 besnook
besnook's picture

while the fundamentals, as everyone expects them to be exposed with the upcoming quarterly reports, suggest a correction is due the indexes as inflation proxies cannot be ignored. the other fundamental is the bond/equity flow. money used to flow to equities as interest rates rose and back to bonds when rates fell. when that gets back to reality i will pay attention to the rest of the numbers. right now they mean nothing except the for sandp number.

Sat, 07/12/2014 - 17:05 | 4950664 Chief Wonder Bread
Chief Wonder Bread's picture

That's funny.

I get a banner ad for a razor

"Shave goodbye to your old razor. Try Harry's"

Sat, 07/12/2014 - 17:14 | 4950742 Michigander
Michigander's picture

The simplest expanation? Occam says..."We're fucked!"

Sat, 07/12/2014 - 18:28 | 4950770 GooseShtepping Moron
GooseShtepping Moron's picture

Occam's razor, which was never explicitly formulated by William of Occam but is consistent with his philosophical writings, specifically states that real distinctions are not to be multiplied needlessly. Even though William was a nominalist and hence basically incorrect, this maxim has a legitimate application in metaphysics, for otherwise we might end up postulating a plurality of substantial forms in the same composite.

Sun, 07/13/2014 - 01:32 | 4951572 gallistic
gallistic's picture

Your pretense of erudition betrays you, troll....

Good Google (wikipedia?) search Grampa!

entia non sunt multiplicanda praeter necessitatem

Sat, 07/12/2014 - 17:31 | 4950773 oklaboy
oklaboy's picture

now can anybody answer the "when" portion of this quiz kids

Sun, 07/13/2014 - 17:10 | 4953280 messymerry
messymerry's picture

Since I am already a well established loon, I have nothing to lose.  We will pass the knee of the collapse curve while his majesty and lord of all the lands B. Hussein is still enthroned...

 

Sat, 07/12/2014 - 17:57 | 4950827 DOGGONE
DOGGONE's picture

Recall where your head was last time.
http://patrick.net/forum/?p=1230886

Sat, 07/12/2014 - 17:59 | 4950830 malek
malek's picture

Mish -which I respect much- just displayed a wrong, almost deceptive use of Occam's Razor at http://globaleconomicanalysis.blogspot.com/2014/07/does-fed-really-belie...
Problem is his offered options are vastly incomplete:

Contrary to his option 1, more complex evil don't exclusively rely on conspiracies and organized setups. If the wrong rules exist, evil can become self-organizing with no central organizer too!

On option 2 I'm missing any perspective to how likely (Occam!) it is Krugman et al. are incapable (not just unwilling!) of grasping the falsehood of their wonderland premises.

Sat, 07/12/2014 - 18:42 | 4950936 Yancey Ward
Yancey Ward's picture

Well, this is because you guys haven't been following the lastest and bestest scientific economic research that has conclusively disproven Occam's Razor.

Sat, 07/12/2014 - 22:44 | 4951430 lasvegaspersona
lasvegaspersona's picture

Show me the charts of the Weimar 1922 to 1924 and of Zimbabwe 2002 to 2008 and I'll show you what you are missing.

When things get really bad you have to lie.

and...They will change the rules when they have to.

Yes the past can predict the future but not when it really is different this time.

Now we are dealing with a currency death and a monetary system change.

We will likely see some pretty strange things soon.

Sun, 07/13/2014 - 07:15 | 4951837 KidHorn
KidHorn's picture

Things are different this time. In the past, the FED was ignorant of bubbles and was taken by surprise when the bubbles popped. Now, they know they're in a bubble and will do everything to prevent popping.

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