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.

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