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I don't know much about finance, but this article seems to beg an obvious question - Sure, Wall Street emulates a random walk. Savvy investors will not try to
by lukev 16y ago
I don't know much about finance, but this article seems to beg an obvious question -
Sure, Wall Street emulates a random walk. Savvy investors will not try to pick stocks, but recognize the random nature of the market and invest accordingly. Fine.
But then he puts down the "self-proclaimed experts" who believe the market is not random, behave as if it is not, and would have you believe the same.
Isn't it only because of those experts in competition with eachother that the market can be seemingly random? The market approximates a perfect market only because of all the people/algorithms constantly eagle-eyed for an over or under-valued stock. Ironically, if everyone acted as if the market were random, the market would become less perfect, and it would then become stupid not to look at the real factors behind stock prices.
Or am I missing something?
- DennisP 16y agoI think you're completely right. Market efficiency is the opposite of a self-fulfilling prophecy. The more people believe it, the less efficient the market. A paper I read once: somebody had a market simulation with a bunch of agents looking at fundamentals. He got a nice smooth market that approximated the "real" prices pretty closely. Then he changed it and made the agents attempt to predict each others' actions. The whole market turned chaotic, unpredictably swinging up and down.
- lukev 16y agoHm. I'm kind of surprised that that outcome was even in doubt. Any algorithm based on externals is going to be more stable than a self-referential algorithm, simply because self-referential algorithms are extremely prone to feedback loops.
- DennisP 16y agoI agree it's not too surprising. What's more surprising is that efficient-market theorists ignore the fact that so many traders in the market are using the self-referential algorithm.