Why aren't economists rich?

By Andrew Beattie AAA
A:

"If you're so smart, how come you're not rich?" is a question that economists seem to invite. If they can explain the intricacies of economies and worldwide markets, surely they could make a killing in the stock market. This is often not the case. One disadvantage economists have is that their profession deals heavily with theoretical, rather than practical, studies. They are often encouraged to oversimplify variables in order to make models work. This works for academia, but investors often find that the devil is in the details.

Theoretical economists of the model making variety have made large amounts of money working as quants, but when the market strays from the model, as it did with LTCM, the gains can quickly vanish. Economists in these jobs usually make their wealth via a salary payment like their academic counterparts rather from stock gains.

A select number if economists have made fortunes as pure stock investors. Many economists, even Karl Marx, have put on the hat of the stock speculator. The two richest economists in history, thus far, were investors. John Maynard Keynes made a fortune in the 1920s, and lost it in the crash, only to build another fortune by snapping up stocks in the aftermath. He died a millionaire, not as the richest economist. (Read more about Keynes in our article, Giants of Finance: John Maynard Keynes.)

That honor belongs to David Ricardo (1772-1823), a British economist who was also a bond trader – there were no stocks other than the East India Company during his lifetime. Ricardo was a master of arbitrage and made a fortune exploiting differences in pricing between comparable government bonds. Foreshadowing Keynes, Ricardo was also highly contrarian. By buying up British war bonds when they were selling at a steep discount due to Napoleon's victories, Ricardo is said to have made 1 million pounds when Napoleon was defeated at Waterloo. So, while the majority of economist are not exceedingly rich despite their training, some have definitely lived up to the high expectations.

This question was answered by Andrew Beattie.

RELATED FAQS

  1. What is QE3 (quantitative easing)?

    "Quantitative easing" refers to steps that the U.S. Federal Reserve takes in attempting to boost the country's lagging economy. ...
  2. How is Libor determined?

    Libor is the major rate used to price debt stock. Libor is actually a set of several benchmarks that reflect the average ...
  3. Why do interest rates change?

    Interest is simply the cost of borrowing money. As with any good or service in a free market economy, price ultimately boils ...
  4. What are austerity measures?

    Austerity measures are attempts to significantly curtail government spending in an effort to control public-sector debt, ...
RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. Global Recession

    An extended period of economic decline around the world. The ...
  3. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  4. Heckscher-Ohlin Model

    An economic theory that states that countries export what they ...
  5. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that decreased and ...
  6. Current Account Surplus

    A positive difference between a nation’s savings and investment. ...
comments powered by Disqus
Related Articles
  1. Cost-Push Inflation Versus Demand-Pull ...
    Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull ...

  2. The Austrian School Of Economics
    Economics

    The Austrian School Of Economics

  3. A Primer On Reserve Currencies
    Economics

    A Primer On Reserve Currencies

  4. What You Should Know About The U.S. ...
    Economics

    What You Should Know About The U.S. ...

  5. Introduction To Remittances
    Economics

    Introduction To Remittances

Trading Center