Logical Vs Mathematical Markets

I occassionally take the opportunity to read articles at the Ludwig Von Mises Institute website. An article today titled "Mathematics Versus Economic Logic" may prove valuable for traders who desire a deeper understanding of market mechanisms. I must warn you that the scholarly style of the writing makes for sometimes difficult reading for those of us not schooled in the esoteric world of economic philosophy, but I think it is worth the effort.

Mises wrote, "Economics is not about goods and services; it is about the actions of living men. Its goal is not to dwell upon imaginary constructions such as equilibrium. These constructions are only tools of reasoning. The sole task of economics is analysis of the actions of men, is the analysis of processes."

I think, by extension, we could apply this statement to the study of financial markets. Our goal is not to dwell upon imaginary constructions such as moving averages of prices. These are only tools of reasoning we use in our analysis of market processes. While our explicit purpose is to profit from these market processes, our implicit purpose is understanding and analysing the actions of men behind these processes.

Mises goes on to say, "There is no such thing as quantitative economics."

Whether you agree with that statement or not, it has profound implications for the state of current affairs. To a large degree, the explosion of mortgage derivatives is based on the notion of quantitative economics, and we can see how well that worked out. In recent years, there has been an increase in the number of hedge funds using quantitative trading methods. At least these funds will have to prove their utility or go out of existence, but individual traders should be cautious about using such appraoches unless they have deep pockets.

Technical analysis of markets is not physics. To the extent that we understand the actions of market participants, we will be better traders.