The Myth of the Rational Market
If you only read one book about the efficient markets hypothesis this year, it should unquestionably be Justin Fox’s new book, The Myth of the Rational Market. Among other things, thanks to this book I now finally understand why the two different versions (strong and weak) of the efficient markets hypothesis are considered two variants of the same thing. The “weak” EMH says that stock market motions are unpredictable and a person without access to private information can’t “beat the market” in a consistent way. The “strong” EMH says that stock market prices are in fact correct and, therefore, that liquid financial markets allocate capital perfectly. The weak version of the theory is pretty well-supported by the empirical evidence. The strong version is thought to follow from it on the theory that the reason an investor using public information can’t beat the market is that the publicly available information is already factored into the price. Thus, the market price is not just random, but efficient.
The book does a great job of laying out these hypotheses and the debates that have ping-ponged back and forth over whether one or both of them is true for the past 80-100 years. For a book that’s basically about the technical analysis of financial markets, it’s a strikingly engaging narrative, and the lay person is bound to learn a lot from it.
In some ways, however, the most interesting thing about the story is simply how little progress is actually made on this question over the years. Economists’ tools seem to get more sophisticated, but the debate stays in more-or-less the same place. The strong EMH certainly doesn’t seem true—market history is full of crashes and bubbles. But the EMH is a nice, solid totalizing theory that can serve as the basis of a research program. By contrast, while you can poke tons of holes in strong EMH, you can’t really produce an alternative totalizing theory. Such a theory would, after all, violate weak EMH. And if you had such a theory, you would use it to make money and in doing so restore the market to equilibrium. But then you circle back ’round to the fact that the market exhibits all these huge irrational swings. This, in turn, seems to me to come back ’round to chapter twelve of Keynes’ General Theory. But apparently economists are uncomfortable with those ideas because they’re not “mathed-up” properly.
39 Responses to “The Myth of the Rational Market”
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June 18th, 2009 at 3:17 pm
I’ve never gotten why the weak version claims the word ‘Efficient.’ One would have a very hard time beating a roulette wheel consistently, does that make the roulette wheel efficient?
Inscrutable Market Hypothesis makes a good deal more sense, especially if one listens to market analysts lame attempts to explain any particular market movement.
June 19th, 2009 at 8:32 am
I have to confess I’m somewhat bewildered as to why a refutation of the strong EMH does anything to the weak EMH. Maybe I’m missing something from the argument, but once you postulate that investors are not actually rational actors, you get stock movement that requires an understanding of investor psychology to predict. Thus the weak EMH stands and the strong EMH falls. I think part of the problem is the refusal of economists to recognize that their rational actor model is utter crap.
June 19th, 2009 at 8:53 am
As an equity trader for the last 10 years, I have an alternative theory. The market is a casino. The big houses taking the bets win, and everyone else doesn’t really understand the rules.
June 19th, 2009 at 9:00 am
You are really talking about the “semi strong” version in most of this post.
The weak version is just stock price and volume data (really all market data). The semi-strong adds in known publicly available fundamental data about the individual companies or groups of stocks. The strong adds in all information, public and private.
But you are very correct in going after this particular part of the free markets cannon. All of the rest of the theory depends on the EMH being true in all of its forms. I
If the EMH is not true, then someone can beat the market. If someone can beat the market, that someone must be able to beat it and beat it consistently. If someone can consistently beat the market, this implies that human thought is wiser than the invisible hand at resource allocation decisions. Some humans will be better able to allocate resources than the market. Therefore, some amount of human planning will be objectively better than letting the market make every allocation decision.
I promise you will never hear this logical chain come out of Tyler Cowen’s mouth, but it is difficult to refute.
The problem is that with most identified anomalies, the anomalies disappear once they have been identified. Only a few have shown any type of long term sustainablilty. But, a few have. In particular, Price to Book and Small Caps
June 19th, 2009 at 9:04 am
As Matt says, the presence of irrational actors is already factored into the price under the strong EMH. “Circle back ’round” indeed. This discussion relates directly to the financial reforms being considered. I’ll accept irrational actors in the banking sector, it’s the rational ones I don’t trust. Big banks may have been necessary (or at least beneficial) when banking (i.e., money flows) were slow (inefficient), but why today when everything occurs in real time? The big banks are rational actors, for they control the keys to the safe, and with that control, the fees paid to themselves. It’s as though we are considering financial reform through the prism of early 20th century financial markets.
June 19th, 2009 at 9:16 am
Money is not real. Money is an abstraction and over time it has become an ever more complex abstraction. Developing theories about abstractions is a fools errand. Economics is no more a science than astrology. In 500 or 1000 years this era will be looked back at as the age of economics and we will be seen as utterly mad.
June 19th, 2009 at 9:19 am
My take on the three levels of EMH is:
Weak – Means the market takes all historical moves into account, so technical analysis is useless, but you can beat the market with financial analysis of the companies and the economy.
Semi-strong – The market takes into account all historical moves and all other public economic data, so the only way to beat the market is to cheat and use insider info.
Strong – The market takes all possible info into account, so it’s just plain impossible to beat the market.
June 19th, 2009 at 9:40 am
The strong EMH certainly doesn’t seem true—market history is full of crashes and bubbles.
While this doesn’t exactly end the discussion, I think it is important to understand that NO version of the EMH implies that the markets will always perfectly predict the future. That is because even a person incorporating all available information may not be able to perfectly predict the future.
So the question with things like bubbles and crashes becomes whether they were understandable in light of the limits of the information available at the relevant time, not whether they were consistent with a person who had an unerring ability to predict the future. And that turns out to be a really difficult question to answer.
The problem is that with most identified anomalies, the anomalies disappear once they have been identified. Only a few have shown any type of long term sustainablilty. But, a few have. In particular, Price to Book and Small Caps.
Those may not be anomalies, if you accept the theory that those measures are correlated with one or more risks that aren’t captured by standard measures of market risk. To give one crude version of such a theory, the returns on “value” and small stocks are plausibly more correlated with employment than large/”growth” stocks. In turn, for many investors their investable income is correlated with employment. So, taking their employment and their stock portfolio together, overweighting small/”value” may be introducing more risk for many investors than will be measured if you look at their stock portfolio alone (e.g., by assuming away any possible variance in the contribution stream resulting from employment changes).
June 19th, 2009 at 9:59 am
I don’t think you can just say weak emh accepts unpredictibility. I think you have to accept the existance of irrationality. The recent crisis was not caused by an unpredictable event. No hurricane destroyed any crop; no war interrupted the oil supply. The capacity of the market to satisfy a specific avenue of popular, irrational investment was reached, and collapsed.
The market price for investments is determined by the irrationality of some investors, and the capacity (or perceived capacity) to take advantage of that irrationality, by others. The weak emh then assumes that the suckers market of irrational investors will continue to attract investment from wiser sources who profit from the suckers until the point is reached when that is no longer possible. You don’t actually need to reach that point, rather the market should get to the point where the next potential investor doesn’t have confidence he can beat the market.
But what if there aren’t enough rational investors? Even weak emh assumes that there is a continuum of rationality, and that there will be sufficent wealth and effort among the more rational so that the next investor shouldn’t be sure if he can beat the market or not. However, if there is a stark discontinuity in the distribution of rationality, it could be the case that the rational investors may not have the resources to take the suckers for all they can.
This latter state presupposes some ability for the hyper astute investor to recognize such a capacity in himself. There’s no shortage of people who know that they’re smarter than everyone else, the problem is that they’re idiots. I don’t know exactly how such accurate introspection would come about, but if there was a sufficiently radical discontinuity in the rationality of the public, it might be self evident. If you unwittingly entered a room filled with people who were severely mentally retarded, you’d catch on quickly. You might make a mistake or two, and assume that everyone in the room suffers from retardation, when there are a few who do not, but you will quickly recognize that. If they announce that the high stakes poker tournament is beginning, and they each pull out $10,000 bank rolls, it is likely that there could be more tables than non-retarded poker players.
I believe this latter situation is what Warren Buffet sees. He and others like him believe that his capacity to take money from the fools in the market is limited by the time he wishes to spend doing so. I find it hard to believe that such an odd situation would exist, but I don’t rule it out.
June 19th, 2009 at 10:02 am
Weak EMH simply means random walk, no? Meaning, that future price behavior can’t be predicted from past performance.
If either the semi-strong or strong EMH is false, information allows you to beat the market (unless the market never becomes “rational” — i.e., that information doesn’t at some point eventually get reflected in price).
So I think it breaks down like this:
1.If the market is strong EMH, you can’t beat the market; all information is immediately reflected in price.
2. If the market is semi-strong EMH, you could only beat the market with private information; all public information is immediately reflected in price.
3. If the market is weak EMH, there’s the possibility of beating the market with public or private information; only prior price info is useless.
4. If the market isn’t even EMH, even historical pricing information — i.e., purely momentum-based trading strategies — could beat the market.
I think the key point is that bubble dynamics in a weak EMH market actually would permit a so called “long-run” investor, trading on publicly available fundamentals information, to consistently beat the market.
My own belief is that bubbles don’t always necessarily pop, that even private information doesn’t automatically beat the market. But that is a radical view, conceding the possibility of pricing behavior that is entirely — and permanently — meaningless.
If bubbles do eventually pop, then investors can indeed beat the market in the boring, old-fashioned way that Warren Buffett does it: by paying attention to public information that appears to not yet be reflected in price.
June 19th, 2009 at 10:05 am
I had not seen daveNYC and Njorl comments above when I wrote my previous comment.
I think both get it exactly right.
June 19th, 2009 at 10:34 am
Not quite. The other way to regularly beat the market under a semi-strong EMH is if your actions in the market are perceived by other market actors as indicative of new public data. Market movers can take advantage of the broader irrationality of other market actors. Lots of market actors follow the leader, which gives the leader an innate ability to beat the market, even when it is rational for other actors to perceive the leader’s actions as indicative of previously unknown information. Basically, you don’t need to actually use insider information to beat the market under a semi-strong EMH; you only need other market actors to believe that you’re using insider information.
June 19th, 2009 at 11:00 am
Robert, perhaps your exception isn’t really an exception at all.
Under semi-strong EMH, all public information is correctly priced.
Under your example, the public information being correctly priced is the fact of a trade being executed by a market leader perceived to be trading on insider information.
In the event the market leader actually has insider information, naturally it’s that private information that allows him to beat the market.
When he doesn’t, the private information that allows him to beat the market is the fact of actually having none. The lie itself becomes the insider information.
Either way, certainly seems like cheating to me.
June 19th, 2009 at 11:01 am
I don’t think you can just say weak emh accepts unpredictibility. I think you have to accept the existance of irrationality. The recent crisis was not caused by an unpredictable event. No hurricane destroyed any crop; no war interrupted the oil supply.
Before I go further, please note I don’t actually have a dog in this fight. I just think it is important to note there are ongoing arguments about all these issues without clear winners.
Anyway, large-scale uncertainty doesn’t have to be driven by events as dramatic as hurricanes and wars. In sufficiently complex dynamic systems, it can actually just be produced by high degrees of sensitivity to initial conditions–this being the central insight of “chaos theory”. To expand just a bit, if the system has feedback mechanisms such that small perturbations can sometimes quickly grow at exponential rates, you can get what looks like large-scale random effects without equally large-scale causes (the so-called “butterfly effect”). And even more relevantly, you can get lots of “black swans”, “long tails”, “structural breaks”, and so on, meaning in general large-scale events the probability of which was not apparent from prior observations of the system’s behavior.
Given all this, as applied to the financial system it can be extremely difficult to know on the fly what you are looking at when things are not behaving the way they have in the past. With respect to “bubbles”, the contemporaneous argument usually boils down to the “bears” arguing there is a speculative bubble, and the “bulls” arguing that there has been some sort of explanatory structural break. And it turns out that sometimes the “bears” appear to be right (after the “bubble bursts”), and sometimes the “bulls” are right (the “bubble” doesn’t actually burst at all and history records it as a real change in the nature of the financial system).
But even when the “bears” turn out to have made the right prediction, the absence of some dramatic event to “pop the bubble” doesn’t imply this was all knowable in advance. Again, that is because chaotic systems can have these sorts of dynamics even without dramatic causal events.
To repeat, I am not explaining all this to take a side on whether or not it is appropriate to incorporate a lot of irrationality in our models of the financial markets. I’m just noting that given what we understand about chaotic systems, it is actually really hard to win that argument one way or another.
June 19th, 2009 at 11:11 am
Animal Spirits did a good job of relating Keynes’ ideas to our current situation.
June 19th, 2009 at 11:12 am
Buffett on EMH:
“Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient.”
“Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn’t do any good to look at the cards.”
“I’d be a bum on the street with a tin cup if the markets were efficient.”
June 19th, 2009 at 11:13 am
Capital markets, the subject here, are not externally rational. Looked at from the outside they are perfectly irrational if your definition of rational is democratic. Thinking that in general the system is designed to bring the maximum good to the maximum number of people.
From a forensic perspective the actions of those who seek wealth and power, acting through large institutions, are perfectly rational as are the results. Over time the power to control the rules of the markets, the markets themselves, and even the creation of money becomes concentrated, to the benefit of those who have gained the power. The internal logic of the system thus created demands the inflation of the wealth and power of those controlling it. Even as the external logic or rationality of the system deteriorates. Eventually the contradictions become too strong and it breaks down.
In the current case the accumulation of debt long ago exceeded any rational possibility that it could ever be paid off. The expansion of credit however was the engine used to inflate the markets. When the default on debt exceeded credit creation asset prices tumbled. The internal logic of the markets collapsed. The current situation is comprised of the government now trying to provide enough credit to restart the old dynamic which favored the market owners.
There was nothing rational about Lehman turning over their entire trillion dollars of assets several times a day to garner some tiny percent gain, the year before its collapse. When looked at from the outside. Internally it all made perfect sense.
June 19th, 2009 at 11:14 am
I could (easily) be wrong, but random walk really comes into play with Strong EMH. If an asset is perfectly priced using all available information both public and private, then the next price move has an equal chance of being up or down because any thoughts as to the positive or negative nature of the next bit of news would already be priced in.
June 19th, 2009 at 11:28 am
You’re assuming economics is about money. Economics is about allocation of resources. Money, while an abstraction, is a placeholder for the value of very real resources. You can have $50 worth of labor, property or food, money makes exchanging them easier.
The concept of energy in physics is similar. You can have kinetic energy, potential energy, binding energy etc, and they can be exchanged one for another. When a meteor falls to earth, it exchanges potential energy for kinetic energy. Energy is to physics as value is to economics. We’re just much more accurate. We sometimes get 9 significant figures from our models, while economists sometimes struggle to get one.
June 19th, 2009 at 11:31 am
As an aside, the basic problem with deferring to Buffett on market issues is that he isn’t a normal market participant: rather than just taking passive stakes in company stocks and other liquid assets, he often takes sufficiently large stakes such that he can exercise some degree of control over subsequent events. As a result, the entire EMH discussion is actually largely inapplicable to what Buffet does.
June 19th, 2009 at 11:35 am
DTM, wouldn’t it make more sense to also conceive of systemic chaos as a reason irrationality occurs, rather than merely as an explanation for erratic rationality?
Sure, complexity does indeed suggest that perfectly processed current information often allows for very surprising future information. But doesn’t it also imply that perfect processing of current information is itself extremely difficult, if not impossible.
Perhaps we’re talking past each other here, but it seems to me that current understandings of chaotic systems might actually make the argument a lot easier to win.
June 19th, 2009 at 11:40 am
Fair enough.
June 19th, 2009 at 11:49 am
Not to be a prick, but how many other books about the EMH did you read in order to reach this conclusion? The less snarky version of my question would be, what other good books about EMH are there (because I know nothing more about it than what Wikipedia says)?
June 19th, 2009 at 11:51 am
I’m not really sure I understand the difficulty. Couldn’t it be that the market price is the best human approximate understanding and prediciton of the complex factors involved AND that we often suck at it?
Best available does not equal fantastic!
June 19th, 2009 at 11:55 am
“You’re assuming economics is about money. Economics is about allocation of resources. Money, while an abstraction, is a placeholder for the value of very real resources. You can have $50 worth of labor, property or food, money makes exchanging them easier.”
I don’t mean to be snippy but the topic is the stock market, capital markets. Not the economy. An elaborate system of thought has been developed about the function of markets allocating resources by allocating capital. While there is some truth to this, as I argue in the above post, capital markets always tend to periods where the dominant function of the market becomes inflating itself. They generate their own liquidity in a virtuous circle of rising values which is internally rational but is ever more divorced from the broader reality, the broader economy. Tokyo real estate exceeded the value of all US real estate. Dr Koops web site had a capitalization of billions. Both of these developments were perfectly rational in the moment in the context of the markets themselves. The external logic was absent.
I am trying to put a wedge in here to show why the rational market question is not solvable. It isn’t because it’s the wrong question.
June 19th, 2009 at 12:00 pm
Eric,
While market manipulation by actors thought to be trading on inside information certainly is “cheating,” it’s cheating by planting false information rather than by taking advantage of insider information. The other thing is that actors perceived as trading on inside information always benefit from that perception, whether or not it’s rational, whether or not it’s true, and whether or not the actor plays on the perception in a way that constitutes deliberate market manipulation. If your selling a stock causes others to do likewise you can buy back on the downswing; in fact, it would generally be irrational not to do so.
If Bill Gates sells a million shares of Microsoft because he wants to free up cash to buy a palatial estate on some island paradise, but his sale then causes others to think he’s selling based on inside information about Microsoft and they sell off, and then Gates decides to put off his island paradise and take advantage of the chance to buy back the stock at an average of 15% less than he sold it for earlier in the day, no cheating has happened at all.
June 19th, 2009 at 12:02 pm
As an aside, the basic problem with deferring to Buffett on market issues is that he isn’t a normal market participant: rather than just taking passive stakes in company stocks and other liquid assets, he often takes sufficiently large stakes such that he can exercise some degree of control over subsequent events. As a result, the entire EMH discussion is actually largely inapplicable to what Buffet does.
Well, it probably makes an academic discussion of EMH cleaner by ignoring one giant living, breathing, walking, talking example of someone who has made a fortune by exploiting market inefficiencies.
Besides, his observation that a market that is very often efficient is not the same as a market that is always efficient is valid whether you want to consider his personal success in the discussion or not.
Finally, and least importantly, the control argument for why Buffett has been successful is not very compelling to me. Yes, he has exploited control opportunities to his financial benefit. But, that is not all he has done, and doesn’t explain all of his success, or even get at the validity of a fundamental value-based approach. He made billions on investments in things like POSCO and PetroChina (to name two recent examples) with absolutely no influence or control. He simply saw under-priced assets and bought them. Rinse. Repeat.
June 19th, 2009 at 12:22 pm
What I do not understand is how “markets” are considered to be some sort of living thing, separate unto itself. Markets are human constructs. There is nothing perfect about them. There is no economic theory of the legal maneuverings by large stake holders to write laws that benefit them to the detriment of all others. Some recognition that markets have rules and those rules are made in an imperfect political system should be introduced to this whole colloquy. But this sort of consideration is not reducible to a graph or formula.
June 19th, 2009 at 12:54 pm
True, I was using an exaggerated example.
There isn’t a fundamental law that renders a system chaotic. It is chaotic if sensitivity to initial conditions exceeds capacity to ascertain initial conditions. If you improve upon your capacity to ascertain initial conditions, you can render a chaotic system non-chaotic.
You may have a robust model of variables x,y,and z contributing to price p. It may stand up to perturbation tests. But if variable “w” matters, your model breaks down. If the relationship to “w” is obvious, you’ll quickly include it in your next model. But if “w” has a chaotic effect, you may never grasp its significance.
Almost certainly, every investment option has a lot of “w”s. The weak emh has dedicated analysts combing haystacks for these needles and incorporating them into ever improving, but imperfect, models. The individual investor has no way to compete with this. However, what if rigorous analysis of data in ever increasing precision is outperformed by something like a savant talent?
Great chess players don’t play chess like computers. They don’t run through all previous situations to find a similar one, and extrapolate each possible move to compare it to other previously encountered situations. They neither play nor study a sufficient quantity of games to do so. They rely on intuition for some of their moves. While they can usually explain the merit of a move, sometimes, they know a move is good, but their knowledge exceeds their capacity to express it in a portable symbiology like language. The word to explain the value of the move is an 8×8 square with funny pieces on it. Previously, that intuition beat the best brute force analysis technology could offer. Well, computers are beating the best players now, because quantifying almost all variables is possible. Soon, if not already, computers will be able to play every possible game of chess, and always pick the vector to victory.
The “market” – not just the NYEX, but the set of every conceivable investment vehicle – is much more complicated than chess. It is entirely conceivable that some people with a peculiar talent are capable of reliably intuiting relationships that are not detected by analytical methods. If there are many such people, they then form a working part of the efficient market. If there are few, however, they lack the capacity to render the market efficient. When a new investor with this talent arrives, they can have a reasonable expectation of beating the market.
I also have no dog in this fight. I tend to doubt that such people would exist in such small numbers if they exist at all, but I do find the possibility interesting. Regardless, I know I’m not one of them. I just buy indexes and reduce risk as I get older.
June 19th, 2009 at 1:13 pm
While this is probably a good point, we can’t be sure without further analysis. We know Buffet has been a good (or unrealistically lucky) investor because of his enormous wealth which was aquired through investment. He has had active investments, in which he took a hand in running things, and passive ones in which he didn’t. You pointed out
some of his successful passive investments. We know Berkshire Hathaway has exceeded market returns over the years, but we don’t know that Buffet’s passive investments have done so. We only know that some have been successful, and that they have not dragged down the entire portfolio. Maybe he’s getting an aggregate 3% on those investments.
June 19th, 2009 at 1:47 pm
The EMH actually does not presume perfect information. It presumes a certain degree of randomness, with a bell-curve distribution of prices and events, centering on the perfect price.
You can apply the same bell-curve distribution to irrational market movements, across time scale, like booms and busts. There will always be outliers, but they should be a relative, bell-curve anomaly rather than the norm.
In a way, business cycles (and thus market cycles) are a certain form of variation within the bell curve. With each cycle, wealth if magnified, and the bell curve shifts upward. The proper way to understand long-term growth isn’t by looking within business cycles, but between them. This is like looking across a time-scale of successive bell curves by noting their mean or mode.
June 19th, 2009 at 2:03 pm
It’s obvious that neither EMH is true in the absolute sense–the mechanism of producing market efficiency is precisely the exploitation of market inefficiency, which means that outside of equilibrium (i.e., all the time, since things change all the time) there will always be inefficiencies to exploit.
The interesting question is what this deviation suggests in terms of policy. I don’t think it suggests anything. The mere existence of market inefficiency does not imply that state actors can increase efficiency, and it is difficult to see how a state actor would be better at reducing inefficiency than an investor who can reap its rewards directly.
June 19th, 2009 at 2:51 pm
DTM, wouldn’t it make more sense to also conceive of systemic chaos as a reason irrationality occurs, rather than merely as an explanation for erratic rationality?
It is certainly true that chaotic systems don’t rule out irrationality, and indeed irrational behavior could help contribute to the chaos. But again, I wasn’t trying to prove that we don’t need irrationality in the model. I was just explaining why it has proven very tough for anyone to clearly win this argument.
Well, it probably makes an academic discussion of EMH cleaner by ignoring one giant living, breathing, walking, talking example of someone who has made a fortune by exploiting market inefficiencies.
But again, that isn’t really how he made his fortune.
Yes, he has exploited control opportunities to his financial benefit. But, that is not all he has done, and doesn’t explain all of his success.
But it doesn’t need to explain ALL of his successes. As Njorl points out, what you would need to do is look only at his investments where he was just a passive investor and adjust for known risk factors, and then see if his returns are inconsistent with him being somewhere in the expected range of good luck. I honestly don’t know if anyone has ever tried doing that.
June 19th, 2009 at 3:03 pm
Njorl,
You are right, of course, that what counts as chaotic is dependent on our powers of observation and analysis (as augmented by machines), so it is possible that what was chaotic at one time will not be chaotic at another time. And it is also possible that at a given time the financial markets would be chaotic for many but not for some in one of the ways necessary for the EMH not to be true (basically meaning for some reason these people wouldn’t end up numerous and well-funded enough to quickly set market prices in competition with each other).
But suffice it to say, I think we have now done a good job of fleshing out why this is so difficult to really prove one way or another–there are generally many theoretical possibilities consistent with the available observations.
June 19th, 2009 at 3:44 pm
Markets are efficient in the same way that this is the best of all possible worlds.
June 19th, 2009 at 8:41 pm
> Those may not be anomalies, if you accept the
> theory that those measures are correlated with
> one or more risks that aren’t captured by standard
> measures of market risk.
Can you say “epicycle”? I thought you could.
Cranky
June 19th, 2009 at 9:44 pm
“markets are efficient”
“a fool and his money will soon be parted”
and my favorite
“contary to popular belief, there are no bulls and bears on Wall Street, but sheep and wolves, and the money are not made by the baa-baa crowd”
From the latter, one can argue that the role of the regulators is to lull the sheep into complacency. Why should I not trust Mr. Standord? He was audited by Antiguan autorities!
Mr. Sanford loaned 1.5 billion to himself and in general, did different things with investors’ money than reported to them, and the grand total of bribes that was mention was around 100k. Very competitive, I say!
June 20th, 2009 at 11:04 am
I do not think that it has anything to do with “efficient markets.”
The fact of the matter is that not everyone can “beat the market,” because if we define “the market” by the average stock performance, then by definition some portion of investors have to be below average.
Economics is no more a science than astrology. In 500 or 1000 years this era will be looked back at as the age of economics and we will be seen as utterly mad.
So how do we do without economics? Do we simply decide not to study how our resources are distributed? Do we simply avoid all attempts at forecasting trends?
June 20th, 2009 at 4:15 pm
To take a non-market example, the heliocentric model of the solar system was available to the public centuries before Copernicus; but the public did not adopt it.
So one can imagine that while correct information is out there, there is bad information too, and what is factored into the market is heavily weighted in favor of the bad information.