Don't Get Ruined by These 10 Popular Investment Myths (Part I)

By: Elliott Wave International

You may remember that during the 2008-2009 financial crisis, many called into question traditional economic models. Why did the traditional financial models fail?

And more importantly, will they warn us of a new approaching doomsday, should there be one?

That's a crucial question to your financial well-being. This series gives you a well-researched answer. Here is Part I; come back soon for Part II.

The Fundamental Flaw in Conventional Financial and Macroeconomic Theory

By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)

Every time there is a recession, observers grumble about economists' methods. The deeper the recession carries, the louder the grumbling. The reason that widespread complaints occur only in recessions is that economic forecasters as a group never, ever anticipate macroeconomic changes. Their tools don't work, but consumers of their commentary do not notice it until recessions occur, because that is the only time when everyone can see that the methods failed. The rest of the time, when expansion is the norm, no one notices or cares.

The recent/ongoing economic contraction is the deepest since the 1930s, so the complaints about economists' ideas are the most strident since that time. Figure 1 shows how one publication expressed this feeling following four quarters of negative GDP.

Figure 1

Ironically, once the economy begins expanding again, everyone forgets about their old complaints. The media resume quoting economists, despite their flawed methods, and they are once again satisfied that their ideas make perfect sense.

Conventional financial theory relies upon the seemingly sensible ideas of exogenous cause and rational reaction. Papers are packed with discussions of "exogenous shocks," "fundamentals," "input," "catalysts" and "triggers." Stunningly, as far as I can determine, no evidence supports these ideas, as the discussion below will show. Continue reading "Don't Get Ruined by These 10 Popular Investment Myths (Part I)"