4 ms·

It’s kind of amazing in retrospect that “the markets are efficient” was a position leading up to 2008 that didn’t get you laughed out of the room. Nowadays we

It’s kind of amazing in retrospect that “the markets are efficient” was a position leading up to 2008 that didn’t get you laughed out of the room. Nowadays we know that markets aren’t perfectly efficient, 2008 was quite the instruction, and we can now have a serious discussion about degrees of efficiency and inefficiency that the markets achieve.

quixoticelixer- 6y ago
Actually markets are efficient, they just aren't maximally efficient.
- kohlerm 6y ago
  That is like saying that Bubblesort is efficent because it is more efficient than https://en.wikipedia.org/wiki/Bogosort https://en.wikipedia.org/wiki/Bogosort :-) Unless you come up with an upper bound of efficiency loss your statement is IMHO pretty meaningless.
nlitened 6y ago
Wasn’t 2008 crisis due to excessive risk-taking by government-backed banks? I doubt it is an “instruction” on markets efficiency — yes, if a government puts a lot of tax and newly-printed money in ponzi-schemes, bad things will happen.
YZF 6y ago
That's not the definition of an efficient market though. An efficient market isn't a guarantee of a correct price. It just means the known information is reflected in the price: "The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information." 2008 is not a contradiction and the other examples by the parent aren't contradictions either.
- philosopher1234 6y ago
  This is a misinterpretation of what is meant by the efficient market hypothesis. "a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible". What they're saying is that the market correctly sets share prices based on available information. To say that the market is considering available information is tautological and not interesting. The EMH as its popularly understood is not just "the market considers information" (again, not an interesting claim) but "the market considers all information and synthesizes it correctly" which is deflating to hopeful investors and trivially false. My examples are contradictions to this hypothesis.
  - YZF 6y ago
    The point is that you can not beat the market with your interpretation of the available information. This is not a question of the correctness of any given interpretation. Correctness can never be determined, there is no "correct" or "incorrect" interpretation of the available information. EDIT: So one thing to consider is that markets are predictive. A "correct" interpretation is only correct if it can predict what will happen in the future. And because the future is not predictable (proof needed but whatever) there is no way to know which interpretation is "correct".
    - philosopher1234 6y ago
      But this is also obviously false. Markets are subject to human phenomena, like mob mentality, which is the theme of the examples I listed. The same way fantastic tennis players can consistently outperform the rest of the competition, fantastic traders can certainly outperform others. Of course, in an ultra competitive environment, with a massive number of constant competitors, its very hard to retain a number one spot. Its also hard to predict markets because of the very fact that they're inefficient and irrational. There are so many active participants its hard to predict how they will react to available information. Take 2008 for instance. There was public information demonstrating fatal weakness in the housing market, but it was neglected en masse. This makes it very hard to beat the market. Even if you're correct, the market could decide to ignore the facts, and you wouldn't be able to reap any alpha from your observation.
- DiogenesKynikos 6y ago
  2008 was an example in which known information was not reflected in the price. There was a huge amount of mortgage-backed securities that were backed by non-performing loans. Anyone who did due diligence could have figured this out, and some did. But most people didn't do due diligence, so extremely important, publicly available information was not factored into the price of MBSs.
im3w1l 6y ago
I have a competing hypothesis. "Efficiently inefficient markets hypythesis". It says that alpha is possible, but that it takes a lot of work and smarts and that you may be better off working your dayjob than trying to beat the market unless you have comparative advantages.
- imtringued 6y ago
  The thing is that there is a limited of value that the market generates. Like producing half a million tons of steel or something. If you extract more value than the market generates then you have to take that value from someone else who made a mistake. Therefore maximum upside by "beating the market" is limited by the amount of mistakes other people are making and that upside is much smaller than you get from simply taking market returns.
jokethrowaway 6y ago
I think we're arguing semantics. Markets are obviously more efficient than a single investor or you would be able to beat the market with public information. And when you're able to beat the market you're making it more efficient. It's easy for politicians to blame 2008 on the markets, but I think it was caused by Keynesian government policies. I assume we'll have similar problems soon with all the stimuli being granted.

quixoticelixer- 6y ago

Actually markets are efficient, they just aren't maximally efficient.

kohlerm 6y ago
That is like saying that Bubblesort is efficent because it is more efficient than https://en.wikipedia.org/wiki/Bogosort https://en.wikipedia.org/wiki/Bogosort :-) Unless you come up with an upper bound of efficiency loss your statement is IMHO pretty meaningless.

nlitened 6y ago

Wasn’t 2008 crisis due to excessive risk-taking by government-backed banks? I doubt it is an “instruction” on markets efficiency — yes, if a government puts a lot of tax and newly-printed money in ponzi-schemes, bad things will happen.

YZF 6y ago

That's not the definition of an efficient market though. An efficient market isn't a guarantee of a correct price. It just means the known information is reflected in the price: "The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information." 2008 is not a contradiction and the other examples by the parent aren't contradictions either.

philosopher1234 6y ago
This is a misinterpretation of what is meant by the efficient market hypothesis. "a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible". What they're saying is that the market correctly sets share prices based on available information. To say that the market is considering available information is tautological and not interesting. The EMH as its popularly understood is not just "the market considers information" (again, not an interesting claim) but "the market considers all information and synthesizes it correctly" which is deflating to hopeful investors and trivially false. My examples are contradictions to this hypothesis.
- YZF 6y ago
  The point is that you can not beat the market with your interpretation of the available information. This is not a question of the correctness of any given interpretation. Correctness can never be determined, there is no "correct" or "incorrect" interpretation of the available information. EDIT: So one thing to consider is that markets are predictive. A "correct" interpretation is only correct if it can predict what will happen in the future. And because the future is not predictable (proof needed but whatever) there is no way to know which interpretation is "correct".
  - philosopher1234 6y ago
    But this is also obviously false. Markets are subject to human phenomena, like mob mentality, which is the theme of the examples I listed. The same way fantastic tennis players can consistently outperform the rest of the competition, fantastic traders can certainly outperform others. Of course, in an ultra competitive environment, with a massive number of constant competitors, its very hard to retain a number one spot. Its also hard to predict markets because of the very fact that they're inefficient and irrational. There are so many active participants its hard to predict how they will react to available information. Take 2008 for instance. There was public information demonstrating fatal weakness in the housing market, but it was neglected en masse. This makes it very hard to beat the market. Even if you're correct, the market could decide to ignore the facts, and you wouldn't be able to reap any alpha from your observation.
DiogenesKynikos 6y ago
2008 was an example in which known information was not reflected in the price. There was a huge amount of mortgage-backed securities that were backed by non-performing loans. Anyone who did due diligence could have figured this out, and some did. But most people didn't do due diligence, so extremely important, publicly available information was not factored into the price of MBSs.

im3w1l 6y ago

I have a competing hypothesis. "Efficiently inefficient markets hypythesis". It says that alpha is possible, but that it takes a lot of work and smarts and that you may be better off working your dayjob than trying to beat the market unless you have comparative advantages.

imtringued 6y ago
The thing is that there is a limited of value that the market generates. Like producing half a million tons of steel or something. If you extract more value than the market generates then you have to take that value from someone else who made a mistake. Therefore maximum upside by "beating the market" is limited by the amount of mistakes other people are making and that upside is much smaller than you get from simply taking market returns.

jokethrowaway 6y ago

I think we're arguing semantics. Markets are obviously more efficient than a single investor or you would be able to beat the market with public information. And when you're able to beat the market you're making it more efficient. It's easy for politicians to blame 2008 on the markets, but I think it was caused by Keynesian government policies. I assume we'll have similar problems soon with all the stimuli being granted.