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Economist Eugene Fama: 'Efficient markets is a hypothesis. It's not reality
- hunglee2 2y agoanyone who has been on the job search in 2024 can confirm
- whereismyacc 2y agoisn't the efficent market hypothesis just about asset pricing
- jagger27 2y agoWe have very common terms for human assets: - human resources - headcount - talent equity - talent pool - cogs in the machine And countless more. We’re already priced as assets. Openly.
- littlestymaar 2y agoThe efficient market hypothesis, like many things in economics, has been named in a very ideological way (Fama himself agreed with that). First of all in has nothing to do with markets in the general economic sense, as it's merely about financial markets. And then it has nothing to do with “efficiency” in any sense (neither the common sense or the usual economic sense of the word). In fact it's kind of the opposite of efficiency, because when the efficient market hypothesis is true, then it means that the market makers are losing money compared to the passive investors, and that's very inefficient: it gives nobody an incentive to perform the work of capital allocation and instead incentivize everyone to be freeloading on other people's work.
- cen4 2y agoSomeone needs to come up with a Efficient society hypothesis. Its weird Zuckerberg has accumulated all this data about social dynamics and no theories have emerged yet.
- 6510 2y agoThere is permaculture. Growing crops turned out an important part of it but the original thought was the design of a permanent culture. https://www.permaculturenews.org/what-is-permaculture/ https://www.permaculturenews.org/what-is-permaculture/ https://en.wikipedia.org/wiki/Permaculture https://en.wikipedia.org/wiki/Permaculture
- smitty1e 2y agoEfficient Society hypotheses abound. They are called "religions". Their subjectivity helps inform the general human lack of scalability.
- cgio 2y agoAs relationships persist, the information content on the channels of said relationships diminishes in exchange for information efficiency. The channel becomes the omnipresent information. With a budget on information consumption, as the balance of persisted channels increases, the total actual information content circulated diminishes and replaced by "heartbeat" messages in established channels. The efficient society prunes relationships by means of time and circumstances to optimise information exchange. How Zuckerberg's innovation affected the efficiency of society is up for grabs. Disclaimer, this is not an actual theory or research based facts, just a random person responding to the challenge of parent.
- scandox 2y agoIt is folly to increase your wisdom at the expense of your authority.
- dredmorbius 2y agoConstituting and/or explaining what, particularly?
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- datavirtue 2y agoThey are trade secrets.
- pjc50 2y agoSee https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1773169 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1773169 "Markets are Efficient if and Only if P = NP" The market (in any good) is an information processing system which tries to collate a colossal number of variables down to a single one: price. It has the same limitations as other information processing systems, as well as things you may be familiar with from control theory like frequency response.
- jl6 2y agoIf prices encode information, then we are talking about a one-way encoding. You can’t turn that price back into a description of the whole vast supply chain behind it. That gives us another problem: prices can’t tell us whether a price is low for good reasons (efficient processes, technological innovation, economies of scale perhaps) or bad reasons (pollution externalities not included, use of forced labor, low quality ingredients, corners cut). Understanding these factors (“quality”) becomes a complex ordeal and the price doesn’t help. It seems like we have an economy which is highly optimized at reducing price, but extremely primitive at making “quality” transparent enough that price can be properly assessed. A case in point being Amazon marketplace where you can find very low priced products from completely opaque brands with almost zero signal on quality.
- yarg 2y agoMakes me think of good/cheap/fast - pick two. You can't tell from the output price which selection was made.
- kitd 2y agoHence the obsession with customer reviews. In the absence of an objective measure of quality, the easiest to implement is a star rating of "what everyone else thinks about this product".
- dredmorbius 2y agoEasy != Informative. Such review systems are trivially gamed, with exceedingly high incentives to do so. One of the underappreciated benefits of an established retailier with limited suppliers and a centralised buying operation, as with traditional brick-and-mortar establishments (Harrods, Costco, Macy's, etc.) is that those establishments can set their own minimum standards and select merchandise which is highly likely to provide high value to the end customer. The notion that "choice is good" falls flat in the reality that uninformed choice over a range of intentionally insufficient products is not good, and is in fact a form of gambling with low payoffs. Some retailers target high-end products (e.g., Harrods), some mid- or low-market (e.g., Costco). But by restricting upstream vendors, tracking satisfaction, and having their own testing and development of products or offerings, as well as return/warrantee programmes, they can assure a reasonable rate of satisfaction. I'm also finding retailers who sell manifest crap (o hai any Samsung home appliances) can be eliminated from my own list of acceptable outlets for future purchases.
- api 2y agoIf markets were perfectly efficient there would be no entrepreneurs. To start a business of any kind is to hypothesize the existence of a market inefficiency, something the market is not currently doing that would make it more efficient. All business is in some sense arbitrage between state A, the market as it currently exists, and state B, the market with your business in it. A business succeeds if its hypothesis is correct and if it executes well. Also there's this: https://arxiv.org/abs/1002.2284 https://arxiv.org/abs/1002.2284
- asah 2y ago??? technology invention is not about "market inefficiency"...
- littlestymaar 2y agoIt is if you factor in the fact that innovative companies need some kind of financing to begin with, and that if the EMH was true, then it would be irrational for any investor to fund them.
- robertlagrant 2y agoPresumably that wouldn't be the case for any innovative companies, though. There might not be Richard Bransons storming into existing markets and dominating them, but there would still be Microsofts and Googles.
- littlestymaar 2y agoWhy would anyone finance an innovative company if financing companies yourself was always less profitable in the longer term than passively investing (which is what efficient market hypothesis is about)? In fact if the EMH was true, then all hope for financing innovative companies would come from delusional investors making the sub-optimal choice of investing there. How “efficient”.
- robertlagrant 2y ago
- pembrook 2y agoMaybe this is a revelation to…someone? I don’t know why Eugene Fama saying this in 2024 is considered news. The guys entire body of research since the 1960s is about market inefficiencies. Amazing that 100 years later we’re still unable to grasp the nuance of the efficiency idea. We settled this one forever ago, but somehow armchair internet commenters still think they can zing the entire field of economics by saying “lol you guys still think people are efficient robots.” Cool 1940s insult, bro. Yes, obviously markets aren’t perfectly efficient and nobody believes they are. But they trend toward efficiency over time. Ignore this at your own peril.
- littlestymaar 2y ago100 year? Did I accidentally wake up in 2070 without realizing?
- pembrook 2y agoIt may surprise you to learn that these obvious ideas are older than you think. Wikipedia it. In fact, one of the main errors in Karl Marx’s theories from the mid-1800s was the belief that markets were perfectly efficient. He thought profits in a market economy would inevitably fall to 0. It turns out humans constantly want new and different stuff, in unpredictable fashion, and therefore this never happens.
- gdfgdsf 2y ago> one of the main errors in Karl Marx’s theories Another one being the Intrinsic Theory of Value which he borrowed from Adam Smith. Marx allegedly postponed the publication of the 2nd volume of his Das Capital, when he learned about Marginalism, as it would require a complete revision of his theory, but died before he could do it. Von Mises writes that if that's true, Marx was way smarter than his followers.
- philipwhiuk 2y ago> Marx was way smarter than his followers Well that's generally the case, I'd sort of be surprised if he weren't.
- mitchbob 2y agohttps://archive.ph/YHXt8 https://archive.ph/YHXt8
- aaron695 2y ago[dead]
- sylware 2y ago[flagged]
- truckerbill 2y agoI bet most of the authors and proponents of that hypothesis don't actually think it at all. It's justification aimed at useful idiots.
- sylware 2y agoI guess this is the brain-washing required to "motivate" those "useful idiots".
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- xg15 2y agoI think a better word would be "religious dogma" instead of hypothesis.
- deleted 2y ago[deleted]
- ath3nd 2y agoWait until you hear about: - "The law of supply and demand" - "Trickle down economics" or, my favorite: - "The invisible hand of the market"
- aetherson 2y agoNobody sensible believes that financial markets are perfectly efficient. On the other hand, nobody sensible believes they are completely inefficient, or trivially beatable. If you want evidence of this, feel free to go out and beat the market with long plays on the alpha you imagine you have. I think it's usually helpful, when trying to understand the world, to think, "markets are pretty efficient, do they agree with me? If they don't, can I think of a real reason why this may be a case where they're wrong, or am I just engaging in wishful thinking?" I think it is not usually helpful, when trying to understand the world, to be really mad about the EMH.
- onlyrealcuzzo 2y agoWhy does the market need to be beatable if it's inefficient? If the market is chaotic, you can't beat it just because you're smart.
- RandomLensman 2y agoChaotic doesn't necessarily imply there is no way to make pretty accurate forecasts for some horizons (weather would be an example of that).
- immibis 2y agoSome people, like Warren Buffett, do exactly that. But the forecasting is very difficult. It's a full time job for them, and they have the industry connections to obtain information that you or I can't.
- tim333 2y agoBuffett says he doesn't generally believe in market forecasting, he sticks to figuring the prospects of individual businesses, which simplifies things a bit.
- bell-cot 2y agoYep. Plus, any investment strategy which involves "if I'm as good at this as Warren Buffett" is 99.999% likely to fail.
- ittseta 2y agoThe Grossman-Stiglitz Paradox supports this. In fact, economist Grossman's hedge fund has delivered pretty good returns. https://en.m.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.m.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
- sharas- 2y ago"Markets" are rational as betting is rational.
- User23 2y agoI’m confident that hysteresis prevents truly efficient markets.
- jampekka 2y agoWater is wet.
- Horffupolde 2y agoIt’s not a hypothesis. It’s a model.
- GrantMoyer 2y agoLots of comments here are related to "efficient" and "market", but completely unrelated to the "efficient-market hypothesis"[1]. The efficent-market hypothesis is not general supposition that for example all markets are efficient by all definitions, nor that free-market capitalism is efficient. It's a specific hypothsis the prices of financial assets like stocks represent the true expected value[2] of the assets, including when accounting for future retuns. The supposed mechanism driving the property is that finacial asset markets are effectively servo systems[3]; traders trade based on any measureable information and act as feedback which drives prices to the expected values, so any other variables which may affect prices are therefore unmeasurable. Personally, it seems clear to me the hypothesis is literally false. Someone has to have the most actionable information or be the best at measuring. On the other hand, it seems clear that it's practically true for almost all people. The chance that any given person can measure an asset's true value the best is practically negligible. I certainly don't believe I can beat the market. [1]: https://en.wikipedia.org/wiki/Efficient-market_hypothesis https://en.wikipedia.org/wiki/Efficient-market_hypothesis [2]: https://en.wikipedia.org/wiki/Expected_value https://en.wikipedia.org/wiki/Expected_value [3]: https://en.wikipedia.org/wiki/Servomechanism https://en.wikipedia.org/wiki/Servomechanism
- TeaBrain 2y agoRobert Shiller, who had long been one of the most vocal critics of the efficient market hypothesis and the idea of efficient markets, shared the Nobel Prize in economics alongside Eugene Fama in 2013. Shiller is also well known for the Case-Shiller Home Price Index. https://www.nobelprize.org/prizes/economic-sciences/2013/summary/ https://www.nobelprize.org/prizes/economic-sciences/2013/sum...
- creer 2y ago> I certainly don't believe I can beat the market I was with you until this step. That markets are not close to efficient (in the sense of EMH) seems right to me. BUT it does not follow that because of that anyone should be able to beat the market. There is a huge gap between EMH being far from reality (or simply not close) - and that gap being exploitable. (Or more generally, non-EMH doesn't say much as to whether or how things should be exploitable.) For one thing we humans are humans, report to humans, get our news from humans, share this market with humans, etc, and the ones of us who pay attention know how hard it is to account for that.
- lvl155 2y agoEfficient market is suppose to ratably reward risk taking. Does not happen in modern financial markets.
- ot1138 2y agoAs pretty much any professional trader or quant knows, there are degrees of efficiency. Ex-US markets are significantly less efficient than the US. Some US securities are less efficient than others. Certain instruments and exchanges are less efficient than others. Markets become more efficient as a result of entities who make them so. It is possible to make a very good living by being one of these entities.
- bjornsing 2y agoAt what time scales would you say these inefficiencies are easiest to make a good living from?
- financetechbro 2y agoI think OP is referring to brokers and market makers, whose role is to help match buyers and sellers and to maintain liquidity in certain securities, respectively. In which case the time scale would be small (you don’t want to be caught holding something for too long if you’re just a middle man)
- gmd63 2y agoAnd it follows that making a market inefficient through nefarious tactics allows said entities to continue to make a very good living.
- legitster 2y agoThe way "efficient markets" were taught in my econ classes was similar to the idea of a "limit" in calculus. A market can never reach efficiency but it can approach at ever diminishing returns. Efficiency can also include non-tangible value. A lot of people want to own Tesla shares because it makes them feel cool or techie, so it trades at a huge premium over the fundamentals. But it doesn't change the fact that if there is an expected increase or decrease in company performance, the going share price will still adjust amazingly quickly. So "efficiency" is really in the eye of the beholder. One person can look at a circle from 10 feet away and say, "look a perfect circle!" and the other can say "there are no perfect circles" and the second person can be technically correct, but the first person's observation may be perfectly valid.
- sudosysgen 2y agoActually, prices change far less than you would expect and more slowly than they should if they were to reflect information. See: https://en.wikipedia.org/wiki/Nominal_rigidity https://en.wikipedia.org/wiki/Nominal_rigidity This isn't too much of a thing for stocks (most likely because they aren't production inputs), but that's a small part of price signals. In general, the most important prices do not adjust amazingly quickly, because our economy is far too slow and unwieldy and unable to cope with price uncertainty.
- legitster 2y agoRigidity is usually applied to common markets which everyone agrees are pretty inefficient. Efficient markets hypothesis was written specifically with stock markets and exchanges in mind, and it's what the linked article mostly discussed.
- sudosysgen 2y agoRigidity is not thought to be about attributes of the markets, it is a consequence of the productive process that belies them. That it only applies to inefficient markets is circular reasoning, if rigidity makes a market inefficent then surely it applies to inefficient markets. Stock markets are ultimately downstream of production, it is impossible to divorce the efficiency of commodity markets from the efficiency of capital markets. Rigidity is contagious. Firms with sticky prices are wildly considered to incur costs and more negative responses to various macroeconomic conditions, and those costs reduce the valuation of equities, so the inefficiency in production is reflected in equity prices. If prices were not rigid we would see different equity prices. You can try to fix this by looking at every transaction level in isolation and baking in the bias of the next level, but then you're no longer making a statement about the economy and the efficiency of price signals. Instead, you're making an essentially unverifiable statement about the profitability of a limited set of strategies restricted to long/short positions in equities only (which on average is forced to be exactly equal to the market price since every transaction needs a counterparty): Even if there is a hidden variable that makes some strategies better, it will most likely be impossible to pick out which strategies are better because of luck and which are better for a reason if you are modelling the null hypothesis as some sort of random walk with long tail event, the hidden variable will most likely be lost in the noise. You can also try testing it by looking at prices directly, in which case Roll's critique holds. In short, as a broader theory to apply to economic relations and economic calculation, the EMH doesn't hold. As a narrow theory of the profitability of certain trading strategies, it's unverifiable.
- daft_pink 2y agoI think it’s a useful model to understand what should happen under ideal conditions, but it’s not true 100% of the time as participants don’t always act rationally or make correct preditions about the future. It’s a pretty good tool for analyzing markets and understanding what’s happening. Like anything, it’s impossible to create an abstraction that’s 100% correct or works in all circumstances when discussing a massive dynamic system that is the real world and life.
- dekken_ 2y agoSimilarly, there's no such thing as "an ideal gas"
- nuc1e0n 2y agoInteresting hypothesis. But what is the speed of news when filtered through the brains of whole populations of people? It often takes people some time to come to terms with new information to the point where they feel comfortable to reshare it with others. Cognitive dissonance is a powerful resistive force. The study of the spread of memes is something that's the subject of research currently.
- financetechbro 2y agoThis isn’t always the case with algorithmic trading, but I see your point
- nuc1e0n 2y agoEven with algorithmic trading, it's still set up to the whims and biases of whoever owns that computer system.
- Kon-Peki 2y agoA very good discussion about market efficiency with Fama and Thaler from a number of years ago (maybe a month or two before Thaler won a Nobel Prize): https://www.youtube.com/watch?v=bM9bYOBuKF4 https://www.youtube.com/watch?v=bM9bYOBuKF4
- gmd63 2y agoMarkets are efficient. At measuring who cares enough to calculate the price of something, who is exploiting it via fraud, how much society cares enough to investigate that fraud, how good the business actually is, how many people are pumping the stock without knowing anything about it, how many people are dumping the stock without anyone knowing about it, how many people have a grudge against the CEO, how many people want to have the CEO's babies, etc. That they are efficient in communicating what a company is worth on fundamental financial level is laughably incorrect and not even worthy of "in best case scenario" theorizing. What they are efficient at is capturing literally EVERY possible human motivation to buy, sell, or ignore, and distilling it into a single number.
- tarsinge 2y agoSure but that’s not the hypothesis, that’s your definition. Of course a definition is true.
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