What’s LessWrong’s collective mind’s opinion on efficient markets hypothesis? From Facebook feed I vaguely recall Eliezer being its supporter, it also appeared in some of the Sequences. On the other hand, there is a post published here called A guide to rational investing, which states that “the EMH is now the noble lie of the economics profession”.
I have a well-read layman’s understanding of both the hypothesis and various arguments for and agains it and would like to know what this community’s opinion is.
False: There are no $20 bills lying on the ground because someone would have picked them up already.
True: If there are a lot of people scanning the ground with high-powered money detectors, you are not going to find enough $20 bills with your naked eye to make a living on.
I don’t believe in the strong form of the efficient market hypothesis. (I agree with some weaker versions of it).
If all humans made all investing decisions from a perfectly rational state, then the efficient market hypothesis would probably hold true, but in reality people sometimes become either overly confident or overly fearful, creating opportunities to exploit them by being more rational.
That said, in order to beat the market you must be better than the average participant (which is a high bar), and you must be enough better that you overcome trading fees. This is similar to playing poker, you must be significantly better than the average of the other players at the table in order to beat both them and the rake.
For the average person, the advice to simply buy index funds with a portion of every paycheck is the advice that will bring them the most utility, and one could be considered to be doing them a service by convincing them that the efficient market hypothesis was true, even if it isn’t.
My family has been investing for as far back as anyone can remember, and consistently beating the market for as far back as anyone can remember. Hell, my mother compares herself to the indices—which makes perfect sense: if you’re not beating the S&P 500, you may as well just buy whatever is on that. She’s not buying whatever is on that.
We have methods that have been handed down for as far back as anyone can remember, supplemented by the books that back up our methods, some of which are about exploiting systemic holes in the way large funds work—relative legibility, inability of large funds to invest in small companies, etc.
So no.
(Disclaimer: I haven’t invested at all because I don’t have the money to. Once I have a regular and sufficiently large income, I plan to stick it in an index fund until I’ve joined an investment club, spent several years studying the methods, etc., and only start picking stocks after that.)
As Lumifer says, the truth value of the EMH depends on the exact formulation, and there are several variations even within the typical ‘strong/semi-strong/weak’ divisions.
But let me put it this way—I don’t take people who argue against the weak-form EMH seriously, unless they own a yacht.
While we’re here: How do real-world incentive structures interact with the EMH?
In the same way that “No one was ever fired for buying IBM”, is it true that “No one was ever fired for selling when everyone else was”? And would that mean someone without these external social incentives will have an edge on the market? For example, what about a rule like “put money into an index fund whenever the market went down for X consecutive days and everyone is sufficiently gloomy”?
The so-called “weak efficient market hypothesis” is more-or-less correct. The “strong efficient market hypothesis” falls apart once you attempt to taboo “efficient”.
Another way to phrase this is that in some strict sense market “inefficiencies” exist, finding them is a hard problem. (The general case of this problem is NP-hard.)
It’s debated occasionally. I don’t think there is a consensus on LW.
It might be useful for you to distinguish various forms of EMH (e.g. strong, semi-strong, and weak). Many people hold different opinions about different forms.
What’s LessWrong’s collective mind’s opinion on efficient markets hypothesis? From Facebook feed I vaguely recall Eliezer being its supporter, it also appeared in some of the Sequences. On the other hand, there is a post published here called A guide to rational investing, which states that “the EMH is now the noble lie of the economics profession”.
I have a well-read layman’s understanding of both the hypothesis and various arguments for and agains it and would like to know what this community’s opinion is.
False: There are no $20 bills lying on the ground because someone would have picked them up already.
True: If there are a lot of people scanning the ground with high-powered money detectors, you are not going to find enough $20 bills with your naked eye to make a living on.
What is it, even?
I don’t believe in the strong form of the efficient market hypothesis. (I agree with some weaker versions of it).
If all humans made all investing decisions from a perfectly rational state, then the efficient market hypothesis would probably hold true, but in reality people sometimes become either overly confident or overly fearful, creating opportunities to exploit them by being more rational.
That said, in order to beat the market you must be better than the average participant (which is a high bar), and you must be enough better that you overcome trading fees. This is similar to playing poker, you must be significantly better than the average of the other players at the table in order to beat both them and the rake.
For the average person, the advice to simply buy index funds with a portion of every paycheck is the advice that will bring them the most utility, and one could be considered to be doing them a service by convincing them that the efficient market hypothesis was true, even if it isn’t.
My family has been investing for as far back as anyone can remember, and consistently beating the market for as far back as anyone can remember. Hell, my mother compares herself to the indices—which makes perfect sense: if you’re not beating the S&P 500, you may as well just buy whatever is on that. She’s not buying whatever is on that.
We have methods that have been handed down for as far back as anyone can remember, supplemented by the books that back up our methods, some of which are about exploiting systemic holes in the way large funds work—relative legibility, inability of large funds to invest in small companies, etc.
So no.
(Disclaimer: I haven’t invested at all because I don’t have the money to. Once I have a regular and sufficiently large income, I plan to stick it in an index fund until I’ve joined an investment club, spent several years studying the methods, etc., and only start picking stocks after that.)
As Lumifer says, the truth value of the EMH depends on the exact formulation, and there are several variations even within the typical ‘strong/semi-strong/weak’ divisions.
But let me put it this way—I don’t take people who argue against the weak-form EMH seriously, unless they own a yacht.
While we’re here: How do real-world incentive structures interact with the EMH?
In the same way that “No one was ever fired for buying IBM”, is it true that “No one was ever fired for selling when everyone else was”? And would that mean someone without these external social incentives will have an edge on the market? For example, what about a rule like “put money into an index fund whenever the market went down for X consecutive days and everyone is sufficiently gloomy”?
The so-called “weak efficient market hypothesis” is more-or-less correct. The “strong efficient market hypothesis” falls apart once you attempt to taboo “efficient”.
Another way to phrase this is that in some strict sense market “inefficiencies” exist, finding them is a hard problem. (The general case of this problem is NP-hard.)
It’s debated occasionally. I don’t think there is a consensus on LW.
It might be useful for you to distinguish various forms of EMH (e.g. strong, semi-strong, and weak). Many people hold different opinions about different forms.