I have looked through the referenced EY posts and realize in some sense the discussion on lesswrong of EMH is not the usual discussion.
It is the case that markets are “largely efficient,” and that seems to be what passes for the Efficient Market Hypothesis around here. EY suggests “inexploitability” as an alternative for efficiency in stating what is meant: if a market is efficient enough, then an actor can’t come along and have an expectation of excess returns (which the financial world refers to as “alpha”).
But of course in virtually any market you care to examine, you can see people who give every appearance of making predictably more than others in the market. Donald Trump has made more money more consistently trading real estate than most other traders. Peter Lynch, George Soros, Warren Buffett, and a host of others have made more money trading stocks and other financial instruments, and seemingly more consistently, then almost all other stock traders.
If EMH is merely “well its sort of harder than it looks to make money in a market, that is why we call it efficient” Then that is not a very strong statement at all. If in fact people can come along and consistently make more than others, then that is not an efficient market. Along EY’s terms, that market IS exploitable.
Now you or I or many others may fail to exploit it. It may be HARD to exploit. But if it is exploitable, then that is a very different situation to it not being exploitable.
By analogy I might suggest the “Incomprehensible Universe Hypothesis.” IUH suggests it is really hard to exploit the universe by having knowledge of how it works. The second law will win almost all the time. But then someone comes along and points to Albert Einstein, atomic bombs, transistors, space ships that go to the moon. Ahhh.. but risk-adjusted, those were just statistical variances, highly risky lucky guesses that paid off and are most of what we think about due to survivorship and other biases.
Or are there just some people who really can understand the universe well enough to predictably design stuff that will work? Are there some people who understand business and the markets well enough to predictably make higher returns than those they trade against in the market?
So I would submit that the only EMH that is true is this: unless you actually know more or can generate knowledge that is of a quantity and quality that beats many of those you are trading with, your investment performance will not reliably exceed market averages. We believe that there are people who do better as engineers than others, why would we not think that there are people who do better as investors, who successfully exploit the market, especially when we can name them and evaluate their investment performance over decades of time?
I have looked through the referenced EY posts and realize in some sense the discussion on lesswrong of EMH is not the usual discussion.
It is the case that markets are “largely efficient,” and that seems to be what passes for the Efficient Market Hypothesis around here. EY suggests “inexploitability” as an alternative for efficiency in stating what is meant: if a market is efficient enough, then an actor can’t come along and have an expectation of excess returns (which the financial world refers to as “alpha”).
But of course in virtually any market you care to examine, you can see people who give every appearance of making predictably more than others in the market. Donald Trump has made more money more consistently trading real estate than most other traders. Peter Lynch, George Soros, Warren Buffett, and a host of others have made more money trading stocks and other financial instruments, and seemingly more consistently, then almost all other stock traders.
If EMH is merely “well its sort of harder than it looks to make money in a market, that is why we call it efficient” Then that is not a very strong statement at all. If in fact people can come along and consistently make more than others, then that is not an efficient market. Along EY’s terms, that market IS exploitable.
Now you or I or many others may fail to exploit it. It may be HARD to exploit. But if it is exploitable, then that is a very different situation to it not being exploitable.
By analogy I might suggest the “Incomprehensible Universe Hypothesis.” IUH suggests it is really hard to exploit the universe by having knowledge of how it works. The second law will win almost all the time. But then someone comes along and points to Albert Einstein, atomic bombs, transistors, space ships that go to the moon. Ahhh.. but risk-adjusted, those were just statistical variances, highly risky lucky guesses that paid off and are most of what we think about due to survivorship and other biases.
Or are there just some people who really can understand the universe well enough to predictably design stuff that will work? Are there some people who understand business and the markets well enough to predictably make higher returns than those they trade against in the market?
So I would submit that the only EMH that is true is this: unless you actually know more or can generate knowledge that is of a quantity and quality that beats many of those you are trading with, your investment performance will not reliably exceed market averages. We believe that there are people who do better as engineers than others, why would we not think that there are people who do better as investors, who successfully exploit the market, especially when we can name them and evaluate their investment performance over decades of time?