Thursday, July 27, 2017

Non explanation explanations

So I hear the stock market moves because risk premiums move. How do we know risk premiums move? Because the stock market moves? If there is no measurement of risk premium other than stock prices, this is circular reasoning or merely a redefinition of stock prices. Is it worth introducing an amorphous concept in place of a measurable one? Only if you have some reason to do so, or only if it differs in some measurable way. It shouldn't be done simply because it sounds nice or lead us to believe we are explaining something we are not.

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