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The problem here is actually very basic - markets do not enforce efficiency. Period. The efficient market hypothesis is simply wrong. Strong form efficiency wa

The problem here is actually very basic - markets do not enforce efficiency. Period. The efficient market hypothesis is simply wrong. Strong form efficiency was already formally disproven quite a while ago. Weak form efficiency has been show to only true if P=NP. There is not really a strong need to go into why inefficiencies can persist, etc, because at a baseline, it turns out there is no provable theory that markets should be efficient at all. Instead, we have the sort of equivalent of Galileo - people really badly want markets to be efficient. They feel like they should be, because intuitively, it seems like it should work that way (much in the "god does not play dice" sense). People who suggest they aren't, even when math backs them up, are ridiculed. Eventually, as Max Planck said, science will advance funeral by funeral, and we'll stop pretending markets should be efficient based on "the efficient market hypothesis". Or we'll discover P=NP! Which would be much cooler.

mathieutd 5y ago
Do you a reference for these statements? I'd be curious to read more about the topic.
- DannyBee 5y ago
  Weak form efficiency - https://arxiv.org/abs/1002.2284 https://arxiv.org/abs/1002.2284 is one such proof. For strong form efficiency (which requires markets perfectly reflect all available information) - You would have trouble finding people who still believe in strong form efficiency. The weak form paper above cites several papers that go into why strong form efficiency is impossible. There are formal proof versions around. In practice, even empirical studies of strong form efficiency haven't supported it either - it's just very easy to find practical counterexamples.
  - emtel 5y ago
    I skimmed this paper and it seems to be exceptionally bad. The proof sketch offered is that a winning strategy can be verified quickly, but finding a winning strategy requires searching over 3^n possible strategies. But this assumes that brute force is the only possible way to find a winning strategy, and thus proves far too much. A similar argument would prove that sorting is NP hard, if you start by the assumption that the only way to sort data is by trying every possible permutation. I may be wrong, but I'm pretty sure any time you claim to have a proof that a problem is NP complete, but your proof doesn't include a reduction, you're doing it wrong. (The paper does offer what it calls a reduction to 3-sat , but it's completely hand-wavy, and I can't even understand the intuition behind it at all.)
- makeitdouble 5y ago
  I think it's pretty close to Ed Catmull's "Success Hides Problems". The underlying thesis being that market success is orthogonal to your internal company's state, inefficiencies included.
Jensson 5y ago
It isn't about market efficiency at all, people are just incompetent. If people could create good products they would and they would become rich, but they can't. If Samsung suddenly started delivering the same quality as Apple they would make a lot of money long term, everyone knows this and even if it isn't true the people who manage Samsung actually believes it and they try to get there. The reason they can't isn't that they aren't trying but that they don't have competent enough people to get it done. Leaders are a part of "people" btw, so if you say it is structural or organizational bloat, well you fix structural and organizational bloat issues by having competent leaders, so those problems are caused by lack of competent people.
- Tenoke 5y ago
  The argument isn't about a specific company having the competency but that someone would and they would rise above. Also, more specifically - as a Samsung user for my preferences they offer as good or better products than Apple while operating on a smaller budget.
- ElephantsMyAnus 5y ago
  It's about what kind of competence is favored by the market - it favors people who can get funding, which is not necessarily related to the ability to get the job done.
solveit 5y ago
Sure, sure, you can encode difficult computational problems into markets in convoluted ways, but this is uninteresting unless you're into that kind of thing. When people usually say that markets aren't efficient, they don't mean that optimal resource allocation is a computationally intractable problem. They're saying that they see, clear as day, obvious inefficiencies that aren't being corrected. They're saying that there are easily noticeable inefficiencies that aren't being corrected. And finding easily noticeable inefficiencies isn't NP-hard, by definition of easily noticeable. A better version of the efficient market hypothesis would be that markets are inexploitable. There is no easy action I can take that corrects a market inefficiency and makes me money. This is the version that comes up in cocktail party conversations and it's also the one that Dan Luu is talking about. "If XXX is systemically undervalued by the market, why can't I start a company that specialises in using XXX?" The discussion following this question is much more relevant and interesting than encoding 3SAT into economic models.
- DannyBee 5y ago
  It's only uninteresting because economics refuses to be based on anything but the empirical (leading us into the situation we are in now), and so considers things like "math" to be mostly uninteresting "unless you are into that kind of thing". I looked at markets for a while, this is what i saw. Therefore, it's true. As I said, there is no reason those efficiencies should be easily correctable - because markets aren't efficient! That's the whole point. It's only in an efficient market that they would be correctable. This is the same as lots of computational and other problems. Lots of instances are easy and heuristics can often work very well. But you will still come up with situations where obviously broken things happen and are hard to make algorithms work. It's sort of like having a cocktail party conversation about why you can't exceed the speed of light. Except because it's economics, you get stuck because there often isn't any real rigor behind it that you can push on. Just the empirical. Which I get why it's fun to talk about (really!) - without any meaningful rigor, anyone can participate and have fun - got a crazy empirical story? Awesome, that's all you need to prove something in economics! It makes for fun discussions where most people can participate and feel like it's not too hard. I have no issue with that - my issue is of course that the cocktail party is not distinguishable from the field ;) Beyond that, arguing they are inexploitable/unpredictable seems equivalent to whether they are efficient (and in most papers is considered equivalent to the efficiency hypothesis). I'm really unsure how you are trying to distinguish it. Maybe you could formulate it for real and show how it is not equivalent to the efficiency question?
jsnodlin 5y ago

mathieutd 5y ago

Do you a reference for these statements? I'd be curious to read more about the topic.

DannyBee 5y ago
Weak form efficiency - https://arxiv.org/abs/1002.2284 https://arxiv.org/abs/1002.2284 is one such proof. For strong form efficiency (which requires markets perfectly reflect all available information) - You would have trouble finding people who still believe in strong form efficiency. The weak form paper above cites several papers that go into why strong form efficiency is impossible. There are formal proof versions around. In practice, even empirical studies of strong form efficiency haven't supported it either - it's just very easy to find practical counterexamples.
- emtel 5y ago
  I skimmed this paper and it seems to be exceptionally bad. The proof sketch offered is that a winning strategy can be verified quickly, but finding a winning strategy requires searching over 3^n possible strategies. But this assumes that brute force is the only possible way to find a winning strategy, and thus proves far too much. A similar argument would prove that sorting is NP hard, if you start by the assumption that the only way to sort data is by trying every possible permutation. I may be wrong, but I'm pretty sure any time you claim to have a proof that a problem is NP complete, but your proof doesn't include a reduction, you're doing it wrong. (The paper does offer what it calls a reduction to 3-sat , but it's completely hand-wavy, and I can't even understand the intuition behind it at all.)
makeitdouble 5y ago
I think it's pretty close to Ed Catmull's "Success Hides Problems". The underlying thesis being that market success is orthogonal to your internal company's state, inefficiencies included.

Jensson 5y ago

It isn't about market efficiency at all, people are just incompetent. If people could create good products they would and they would become rich, but they can't. If Samsung suddenly started delivering the same quality as Apple they would make a lot of money long term, everyone knows this and even if it isn't true the people who manage Samsung actually believes it and they try to get there. The reason they can't isn't that they aren't trying but that they don't have competent enough people to get it done. Leaders are a part of "people" btw, so if you say it is structural or organizational bloat, well you fix structural and organizational bloat issues by having competent leaders, so those problems are caused by lack of competent people.

Tenoke 5y ago
The argument isn't about a specific company having the competency but that someone would and they would rise above. Also, more specifically - as a Samsung user for my preferences they offer as good or better products than Apple while operating on a smaller budget.
ElephantsMyAnus 5y ago
It's about what kind of competence is favored by the market - it favors people who can get funding, which is not necessarily related to the ability to get the job done.

solveit 5y ago

Sure, sure, you can encode difficult computational problems into markets in convoluted ways, but this is uninteresting unless you're into that kind of thing. When people usually say that markets aren't efficient, they don't mean that optimal resource allocation is a computationally intractable problem. They're saying that they see, clear as day, obvious inefficiencies that aren't being corrected. They're saying that there are easily noticeable inefficiencies that aren't being corrected. And finding easily noticeable inefficiencies isn't NP-hard, by definition of easily noticeable. A better version of the efficient market hypothesis would be that markets are inexploitable. There is no easy action I can take that corrects a market inefficiency and makes me money. This is the version that comes up in cocktail party conversations and it's also the one that Dan Luu is talking about. "If XXX is systemically undervalued by the market, why can't I start a company that specialises in using XXX?" The discussion following this question is much more relevant and interesting than encoding 3SAT into economic models.

DannyBee 5y ago
It's only uninteresting because economics refuses to be based on anything but the empirical (leading us into the situation we are in now), and so considers things like "math" to be mostly uninteresting "unless you are into that kind of thing". I looked at markets for a while, this is what i saw. Therefore, it's true. As I said, there is no reason those efficiencies should be easily correctable - because markets aren't efficient! That's the whole point. It's only in an efficient market that they would be correctable. This is the same as lots of computational and other problems. Lots of instances are easy and heuristics can often work very well. But you will still come up with situations where obviously broken things happen and are hard to make algorithms work. It's sort of like having a cocktail party conversation about why you can't exceed the speed of light. Except because it's economics, you get stuck because there often isn't any real rigor behind it that you can push on. Just the empirical. Which I get why it's fun to talk about (really!) - without any meaningful rigor, anyone can participate and have fun - got a crazy empirical story? Awesome, that's all you need to prove something in economics! It makes for fun discussions where most people can participate and feel like it's not too hard. I have no issue with that - my issue is of course that the cocktail party is not distinguishable from the field ;) Beyond that, arguing they are inexploitable/unpredictable seems equivalent to whether they are efficient (and in most papers is considered equivalent to the efficiency hypothesis). I'm really unsure how you are trying to distinguish it. Maybe you could formulate it for real and show how it is not equivalent to the efficiency question?

jsnodlin 5y ago