What theory has changed, since you last took Economics/Finance courses in college?

[acegolfer]

I'll go first. I updated my knowledge from another BH.

Open Market Operation used "corridor" system pre-2009. Post-2009, we now use "floor" system.

[GAAP]

Dividends were the primary reason driving stock returns and should be the core reason to invest in a stock -- nearly a meaningless concept these days.

[BlueEars]

A good understanding of economics /= stock investing performance

I used to think otherwise.

[montanagirl]

Wasn't the banks' fractional reserve supposed to be about 20%? This would be from my 1984 money and banking class.

[2015]

A good understanding of economics /= stock investing performance

I used to think otherwise.

+1
I now think the more "understanding" one has of economics the more tripping ones does over one's own overconfident feet.

[whodidntante]

Well I'm a recent MBA grad, so anything I say will sound like political commentary. So I'll just be that weird kid who plays alone in the corner.

[saintsfan342000]

Back in my day budget deficits mattered.

[Coltrane75]

In high school and undergrad economics I learned that the marketplace consists of informed consumers making rational choices.

In Business School I learned quite the opposite; to create a market/need/want when there isn't one by utilizing advertising that appeals to people's emotions. In other words, create irrational consumers that will make uninformed decisions if necessary.

[DartThrower]

The Phillips curve.

https://www.npr.org/2018/10/29/66187981 ... rve-theory

https://www.cato.org/blog/phillips-curv ... cbo-models

Especially in Japan.

[DaufuskieNate]

Fama/French factors are new since I went to grad school.

[GoldStar]

Funny - I went to school for Electric Engineering - both undergrad and grad but never took a finance class (could have as elective).
Now I've moved up into management and spend more time working with financials than dealing with engineering - learned on the job throughout the years.

[gtd98765]

In high school and undergrad economics I learned that the marketplace consists of informed consumers making rational choices.

+1

Now there is a lot more understanding that people often do not make rational choices. Some economists now refer to the people we learned about in micro 40 years ago as "econs" compared with the "humans" who are really involved in the economy and making decisions in the marketplace.

[edudumb]

As a business professor currently teaching business theories, simply investing in index funds but still managed to have low returns in 2018.

Theory =/= practice

[edudumb]

In high school and undergrad economics I learned that the marketplace consists of informed consumers making rational choices.

+1

Now there is a lot more understanding that people often do not make rational choices. Some economists now refer to the people we learned about in micro 40 years ago as "econs" compared with the "humans" who are really involved in the economy and making decisions in the marketplace.

Check out Dan Ariely's Ted talks and related work in behavioral economics (which doesn't assume rationality).

[Sconie]

I suspect that economic theory has and always will change and evolve. Back when I majored in Econ in the late 60s, it was always the "fight" between the monetarists of the Chicago School vs. the Keynesians, with the Chicago School subsequently evolving into more of a neoclassical approach, advocating that markets---and not government----are the best way to allocate resources.

Education in economics is not really about theory, though-----it is a methodology, way of thinking----a way of reasoning----designed to help the possessor to draw logical, rational, conclusions.

[bhsince87]

Probably the biggest one for me is that fractional lending and the "money multiplier" don't work like I was taught.

You know, the classic, "Bank gets $1000 deposit. Now it can make a $900 loan (or whatever the reserve limit is). Then that gets deposited at another bank, and that bank can then make an $890 loan." Etc.

I don't know if banking has changed or if it's always worked like this, but I've since learned that banks can make a loan with no reserves at all, and get the reserves later if it needs them. And in some countries, there is no reserve requirement!

So banks can essentially create money out of thin air. And in fact, they create much more than the Central bank/government in many countries.

And somewhat related, if banks don't want to lend and/or consumers and business don't want to borrow, the government can "print" all it wants, but they can't create inflation.

[Broken Man 1999]

Not necessarily a theory, but when I was near finishing my finance degree, the expectation was Japan would dominate the world banking system.

Japan Inc. was the buzzword.

There was a lot of iconic real estate (Rockefeller Center????) snapped up by the Japanese banks.

Didn't work out that way as it turned out.

Broken Man 1999

[beyou]

Behavioral economics is a whole new field.

[quantAndHold]

Since all I took was first year Econ, I would have to say everything. What gets taught in Econ 101 classes, still, to this day, are a bunch of mental models that are theoretically interesting, but don’t actually work that way in practice.

[4nwestsaylng]

I would say that Economics Departments have become much more political/ideology driven, perhaps a reflection of all campus departments. I looked at the faculty descriptions of my alma mater's current Economics Department. First, there are triple the number of faculty economists, and so many of them had very PC
"specialties", such as "the economics of sex workers", "the economics of social justice","gender discrimination",etc, etc.. Not saying that is bad or good, but those PC Phds sure get you in the tenure track now. When I did grad work, it was extremely difficult to get hired on faculty, there were only a few slots in the classical areas. Clearly grad studies have become more inventive.

When I was a student, the Econ professors were in the major theory fields such as International, Macro, Micro, Money and Banking, Econometrics.As students we did not get left/right political browbeating disguised as economic science.

I did receive two offers to complete a Phd at major prestigious universities, but even back in those days I was so familiar with departmental petty politics and the disparity between good teachers and published profs, that I went into another field.

[Jags4186]

I don’t know...do they still teach guns & butter?

[Sandtrap]

I would say that Economics Departments have become much more political/ideology driven, perhaps a reflection of all campus departments. I looked at the faculty descriptions of my alma mater Economics Department. First, there were triple the number of faculty, and so many of them had very PC
"specialties", such as "the economics of sex workers", "the economics of social justice", etc,etc.. Not saying that is bad or good, but those PC Phds sure get you in the tenure track now.

When I was a student, the Econ professors were in the major theory fields such as International, Macro, Micro, Money and Banking, Econometrics.As students we did not get left/right political browbeating disguised as economic science.

yes.
econ,finance,business major in the early 70's. This was all they had.
As I remember, about as exciting as watching latex paint dry on a rainy day.

[4nwestsaylng]

I don’t know...do they still teach guns & butter?

Yeah, like you I am dating myself. We heard all about "guns and butter". I don't know what the current equivalent saying would be, I have some ideas, but I won't detail them on this forum:)

[TomCat96]

That deflation is something that can never be a problem because you can always print money and throw it out of helicopters.

[HoosierJim]

If you look at old school supply and demand of labor - like the availability of nurses based on nurse salary. Some of the factors might be things like workers, education, government regulations where today models must be more dynamic. For example, regulation can effect UBER. But the surge pricing is much more dynamic than a law passed by a local city council. Surge pricing results in non continuous pricing - similar to volume discounts at various break points.

[simplesimon]

In high school and undergrad economics I learned that the marketplace consists of informed consumers making rational choices.

+1

Now there is a lot more understanding that people often do not make rational choices. Some economists now refer to the people we learned about in micro 40 years ago as "econs" compared with the "humans" who are really involved in the economy and making decisions in the marketplace.

Check out Dan Ariely's Ted talks and related work in behavioral economics (which doesn't assume rationality).

Predictably Irrational is also good.

[Epsilon Delta]

I would say that Economics Departments have become much more political/ideology driven,

You have got to be joking.

Adam Smith and Karl Marx were doing economics long before you were born.

If you don't think your economics department was political way back when it is either because you think politics is something bad only other people do, or because the department was not dealing with anything important.

[Barefoot]

My degree is in Engineering from the '70's, but I took several Econ courses.

There are two things I remember that are still true:

1. No matter how many people have tried, you can't repeal the law of supply and demand.

2. There's no accounting for taste.

[4nwestsaylng]

I would say that Economics Departments have become much more political/ideology driven,

You have got to be joking.

Adam Smith and Karl Marx were doing economics long before you were born.

If you don't think your economics department was political way back when it is either because you think politics is something bad only other people do, or because the department was not dealing with anything important.

Of course Economics has political bias, we had Adam Smith enthusiast professors, and we also had an open Marxist professor.

As students we recognized both.And as you know, before Economics and Political Science became distinct "fields", they were often combined and labelled "Political Economy".

I do think that the expanded faculties and "new" specialties in Economics as detailed above are more reflections of generational creativity in securing tenured positions.

Ultimately, Economics is not a "science", but an attempt to explain how human nature results in various outcomes. I think I have learned more in life about Economic reality than what my tenured professors taught me, but at the time I knew not to question "free trade" or Keynesian theory too much, as it was dogma, and largely still is.And in my Marxist professor's class, one knew not to challenge too harshly his positions.

That is called "graduating from college". Nothing much has changed.

[Jiu Jitsu Fighter]

Macro was all Keynesian garbage. They removed all of the pages from the Paul Samuelson textbooks that raved over the Soviet Union's economic system.

[JBTX]

- The whole impact of budget deficits and whether they matter, and how they may matter.

- monetarism faded as a viable alternative POV.

- The economy is much more global.

[JBTX]

Macro was all Keynesian garbage. They removed all of the pages from the Paul Samuelson textbooks that raved over the Soviet Union's economic system.

Keynesianism is not garbage. It is probably more enduring than many recent economic schools of thought.

Now what you and others may not like, and understandably so, is the extension, exaggeration and even distortion of keysnesianism as a means of advocacy for certain policies.

[columbia]

In high school and undergrad economics I learned that the marketplace consists of informed consumers making rational choices.

In Business School I learned quite the opposite; to create a market/need/want when there isn't one by utilizing advertising that appeals to people's emotions. In other words, create irrational consumers that will make uninformed decisions if necessary.

I was first exposed to rational actor models in 1986 and I’ve always been confused by the premise, given the widespread irrationally in human behavior.

[are_cynic]

...And somewhat related, if banks don't want to lend and/or consumers and business don't want to borrow, the government can "print" all it wants, but they can't create inflation.

I don’t understand why this would not create inflation? The money supply is increasing.

[bhsince87]

...And somewhat related, if banks don't want to lend and/or consumers and business don't want to borrow, the government can "print" all it wants, but they can't create inflation.

I don’t understand why this would not create inflation? The money supply is increasing.

Because people and businesses don't want to spend it. If anything, they want to save more and more.

So they drive interest rates lower.

Japan was the first example, but it happened in much of the rest of the developed world in 2008-2010.

[aspirit]

Probably the biggest one for me is that fractional lending and the "money multiplier" don't work like I was taught.

You know, the classic, "Bank gets $1000 deposit. Now it can make a $900 loan (or whatever the reserve limit is). Then that gets deposited at another bank, and that bank can then make an $890 loan." Etc.

I don't know if banking has changed or if it's always worked like this, but I've since learned that banks can make a loan with no reserves at all, and get the reserves later if it needs them. And in some countries, there is no reserve requirement!

So banks can essentially create money out of thin air. And in fact, they create much more than the Central bank/government in many countries.

And somewhat related, if banks don't want to lend and/or consumers and business don't want to borrow, the government can "print" all it wants, but they can't create inflation.

This subject is very complex and interesting.
I too have been reading up on it’s complexities.
At the end of every day banking institutions used to have to ‘balance out’ ... not no more’’.
In the first 2 chapters of ‘Do not count on it’ by JBOGLE he claims if inflation was calculated like it used to be inu the 80s it would be close to 10%.
You want me to look up the page?

David Einhorn of ‘greenlight capital’ states;;
**Referenced page xx in the introductions section of ‘Don’t count on it’’. The last paragraph on that page states how ‘’our .gov contributes to the distortion of reality’’ concerning inflation changing the way it calculates inflation in the last 35yrs, printed in 2011. That’s about 50 yrs ago. Read it yourself and see how you interpret the text. I interpret it as a ‘variable’ inflation history close to 10% on the up side.

40k- 50k autos? 1M living quarters ? Good luck keeping up w/joneses’!

Good luck!

[Starfish]

I audited a finance class in grad school.
It was all about active trading. Mainly fundamental analysis but not only.
The professor set up a simulation trading account and how much money were made there was partial credit. It was practically a class in day trading.
Oh, this is long time a go. About 2003.

[averagedude]

I didn't go to college, but have always been interested in economics and finance. I went to the school of hard knocks that taught you that it is best to not spend money that you don't have. Today though, it seems that the college professors today are teaching Modern Monetary Theory which rebukes the teaching of where I went to school.

[wootwoot]

Socialism. When I was in college we were taught in economics that Socialism wasn't practical and didn't work. The invisible hand theory provided the best benefits to society. Nowadays free markets are frowned upon and Socialism is being taught as a viable economic theory.

[Phineas J. Whoopee]

As a business professor currently teaching business theories, simply investing in index funds but still managed to have low returns in 2018.

Theory =/= practice

There is no theory that says index funds will always have high returns.

Vanguard's Total Stock Market Index Fund, VTSAX, for example, had a down year in 2018, as did the index it tracks.

The theory says well-run, low-cost index funds will closely track the indexes they follow, not that the indexes will always go up.

PJW

[BJJ_GUY]

1. GSEs were thought to have an implicit government guarantee... and it turned out that they did!
2. Federal Reserve took the GFC as an open invitation to be as manipulative for as long as they wanted to stay, and don't look to be going back soon
3. I once head an economist give a speech about solving something with a negative interest rate -- and he was being somewhat creative, but also thinking he was kind of speaking about the impossible. (I'd love to hear what he had to say when it actually happened across the developed world)

[bhsince87]

1. GSEs were thought to have an implicit government guarantee... and it turned out that they did!
2. Federal Reserve took the GFC as an open invitation to be as manipulative for as long as they wanted to stay, and don't look to be going back soon
3. I once head an economist give a speech about solving something with a negative interest rate -- and he was being somewhat creative, but also thinking he was kind of speaking about the impossible. (I'd love to hear what he had to say when it actually happened across the developed world)

Yes, on number 3, that was another one I thought of today. It was always assumed that zero was the lower bound on interest rates.

Turns out you can offer negative rates on bonds, and people will still buy them!

[HEDGEFUNDIE]

1. GSEs were thought to have an implicit government guarantee... and it turned out that they did!
2. Federal Reserve took the GFC as an open invitation to be as manipulative for as long as they wanted to stay, and don't look to be going back soon
3. I once head an economist give a speech about solving something with a negative interest rate -- and he was being somewhat creative, but also thinking he was kind of speaking about the impossible. (I'd love to hear what he had to say when it actually happened across the developed world)

Yes, on number 3, that was another one I thought of today. It was always assumed that zero was the lower bound on interest rates.

Turns out you can offer negative rates on bonds, and people will still buy them!

Not sure why this was ever in doubt.

Flight to safety is a thing, safety costs money.

[BJJ_GUY]

1. GSEs were thought to have an implicit government guarantee... and it turned out that they did!
2. Federal Reserve took the GFC as an open invitation to be as manipulative for as long as they wanted to stay, and don't look to be going back soon
3. I once head an economist give a speech about solving something with a negative interest rate -- and he was being somewhat creative, but also thinking he was kind of speaking about the impossible. (I'd love to hear what he had to say when it actually happened across the developed world)

Yes, on number 3, that was another one I thought of today. It was always assumed that zero was the lower bound on interest rates.

Turns out you can offer negative rates on bonds, and people will still buy them!

Not sure why this was ever in doubt.

Flight to safety is a thing, safety costs money.

Well it never had before, not with a negative nominal rate.

[GT99]

Socialism. When I was in college we were taught in economics that Socialism wasn't practical and didn't work. The invisible hand theory provided the best benefits to society. Nowadays free markets are frowned upon and Socialism is being taught as a viable economic theory.

Sadly marketing and PR supercede reality and history.


Maybe not changed so much as something I've learned, but it seems like the more someone has studied economics academically, the less able they are to apply basic supply and demand concepts.

[bottlecap]

I learned that almost no one actually understands what they learned about economics in school.

It's a really interesting field, but also very difficult to conceptualize.

The "rational actor" is an example of this. Many people think that until recently, all economists believed that people were "rational", had perfect information, and always made correct decisions. In reality almost none did. These economists weren’t blind or dumb.

The characterization is a broad generalization, an oversimplification, and an untruth all at the same time. An investigation into the history of economic thought debunks this quickly and thoroughly.

Yet we all seemed to have come away from our college courses with this notion. Looking back, it shows a pretty sad state of the education provided on this subject.

JT

[DonIce]

The "rational actor" is an example of this. Many people think that until recently, all economists believed that people were "rational", had perfect information, and always made correct decisions. In reality almost none did. These economists weren’t blind or dumb.

The characterization is a broad generalization, an oversimplification, and an untruth all at the same time. An investigation into the history of economic thought debunks this quickly and thoroughly.

Yet we all seemed to have come away from our college courses with this notion. Looking back, it shows a pretty sad state of the education provided on this subject.

I think the issue here is that most people who take economics courses, do so at an introductory level. Just as someone beginning an education in physics might learn about frictionless surfaces, rigid bodies, incompressible gases, Newtonian gravity, and the like, which are all useful models to begin to understand how physics works but are not complete descriptions of the full complexities of the universe, so too economics students begin with simplified models before delving into deeper complexities.

[market timer]

A few observations:
1. The Philips curve has not aged well.
2. The debate about the sign of monetary policy (do higher rates cause lower or higher inflation?) was asked but not answered conclusively.
3. Technology firms have become major employers of economists in recent years.
4. The research branches of investment banks no longer hire as many economists, as regulation against "soft dollar" funding of research has limited demand.
5. The Fed, buoyed by profits on its gargantuan portfolio, has emerged as a massive employer of economists. I think these are mostly make-work jobs--welfare for PhDs.
6. Many students who would have studied economics 15 years ago are now opting for computer science, adapting to market demands.

If I were in school today, I'd focus on computer science, statistics, and microeconomic theory (marginal incentives, game theory, operations research). Macro seems primarily a way to justify the existence of central banks or further other political causes. Econometrics needs an overhaul in light of advances in machine learning and ability to get experimental data.

[BlueSkies]

In part, the work of these scholars has changed economic theory. They won Nobel prizes as follows:

• 1990 Harry M. Markowitz, Merton H. Miller, and William F. Sharpe
"for their pioneering work in the theory of financial economics"
• 2002 Daniel Kahnemann
"for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty"
• 2013 Eugene F. Fama, Lars Peter Hansen, Robert J. Shiller
"for their empirical analysis of asset prices"
• 2017 Richard H. Thaler
"for his contributions to behavioural economics"

In my Post 8 I cite Fama.
https://grandmasinvestingforbeginners.b ... investing/

Grandma Sylvia

[Jiu Jitsu Fighter]

Macro was all Keynesian garbage. They removed all of the pages from the Paul Samuelson textbooks that raved over the Soviet Union's economic system.

Keynesianism is not garbage. It is probably more enduring than many recent economic schools of thought.

Now what you and others may not like, and understandably so, is the extension, exaggeration and even distortion of keysnesianism as a means of advocacy for certain policies.

Post Keynesians and New Keynesians bastardized Keynes. Regardless, once you get past supply and demand, it is all political ideology.