that time the market proved to be incapable of doing addition.
The caveat from the link that this mistake couldn’t be arbitraged seems important.
I need to resist the temptation here to leap from “can’t be exploited” to “therefore not stupid”, because that’s not what you mean by stupid. But I think it seems important even if I resist that temptation.
This is fair and an important caveat. Pure arbitrage disappears quickly in the market. At the same time, though, no pure arbitrage profits is only necessary and not sufficient for full efficiency. An efficient market means no (or very few) positive expected utility opportunities still left around. The EMH still implies the price of shorts should have fallen until it became economically feasible to correct the mispricing.
The caveat from the link that this mistake couldn’t be arbitraged seems important.
I need to resist the temptation here to leap from “can’t be exploited” to “therefore not stupid”, because that’s not what you mean by stupid. But I think it seems important even if I resist that temptation.
This is fair and an important caveat. Pure arbitrage disappears quickly in the market. At the same time, though, no pure arbitrage profits is only necessary and not sufficient for full efficiency. An efficient market means no (or very few) positive expected utility opportunities still left around. The EMH still implies the price of shorts should have fallen until it became economically feasible to correct the mispricing.