I’m surprised by how consistently misinterpreted the EMH is, even by people with the widest possible perspective on markets and economics. The EMH practically requires that some people make money by trading, because that’s the mechanism which causes the market to become efficient. The EMH should really be understood to mean that as more and more money is leached out of the market by speculators, prices become better and better approximations to real net present values.
I’ve always thought of the Efficient Market Hypothesis as the anti-Tinkerbell: if everybody all starts clapping and believing in it, it dies.
See, for example, every bubble ever. “We don’t need to worry about buying that thing for more than it seems to be worth, because prices are going up so we can always resell it for even more than that later!”
See, for example, every bubble ever. “We don’t need to worry about buying that thing for more than it seems to be worth, because prices are going up so we can always resell it for even more than that later!”
If they actually believed the market they were trading in was efficient they wouldn’t believe that prices would continue to go up. They would expect them to follow the value of capital invested at that level of risk. Further—as applicable to any bubble that doesn’t represent overinvestment in the entire stockmarket over all industries—they wouldn’t jump on a given stock or group of stocks more than any other. They would buy random stocks from the market, probably distributed as widely as possible.
No, belief in an efficient market can only be used as a scapegoat here, not as a credible cause.
I’m surprised by how consistently misinterpreted the EMH is, even by people with the widest possible perspective on markets and economics. The EMH practically requires that some people make money by trading, because that’s the mechanism which causes the market to become efficient. The EMH should really be understood to mean that as more and more money is leached out of the market by speculators, prices become better and better approximations to real net present values.
I’ve always thought of the Efficient Market Hypothesis as the anti-Tinkerbell: if everybody all starts clapping and believing in it, it dies.
See, for example, every bubble ever. “We don’t need to worry about buying that thing for more than it seems to be worth, because prices are going up so we can always resell it for even more than that later!”
If they actually believed the market they were trading in was efficient they wouldn’t believe that prices would continue to go up. They would expect them to follow the value of capital invested at that level of risk. Further—as applicable to any bubble that doesn’t represent overinvestment in the entire stockmarket over all industries—they wouldn’t jump on a given stock or group of stocks more than any other. They would buy random stocks from the market, probably distributed as widely as possible.
No, belief in an efficient market can only be used as a scapegoat here, not as a credible cause.
That’s pretty much the thesis of Markets are Anti-Inductive by EY.