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Maybe 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

Maybe 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 ago
100 year? Did I accidentally wake up in 2070 without realizing?
- pembrook 2y ago
  It 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.
      - datavirtue 2y ago
        The list of technologies adopted by the entire tech industry that are far removed or completely miss the point of their inventor is very long.
- Terr_ 2y ago
  Not OP, but I found an interesting list of works/events [0] indicating that the ideas were in circulation well before 1970. [0] http://www.e-m-h.org/history.html http://www.e-m-h.org/history.html
jongjong 2y ago
I understand that economists are essentially saying that the markets are efficient in the sense that public information is factored into the price of assets in real time. My issue with this idea is that many human beliefs are founded on collective delusions. The market can stay irrational longer than you can stay solvent. So the distinction in the definitions of efficiency doesn't matter since public information and knowledge is highly flawed. What does it mean if incorrect assumptions are factored into the price? It doesn't make sense to call that efficient.
- TheOtherHobbes 2y ago
  It doesn't make sense because it's a dogma used for political ends, not science. I suppose that's efficient in its own way, if you're one of the relatively few oligarchs and wannabes who benefit from it. To anyone rational and politically literate, these and other expedient mainstream superstitions are obvious nonsense.
  - jongjong 2y ago
    I guess it's efficient in terms of ensuring that the prices of assets reflect the social conditioning and incentive structures laid out by the overarching legal and monetary system.
ksynwa 2y ago
> But they trend toward efficiency over time. What does efficiency mean here? And can you support this claim?
- Etheryte 2y ago
  Simply reading an introductory article on the efficient market hypothesis would be a good starting point here, because both of these are basic principles. Efficiency in this context means how quickly and accurately the market incorporates information into asset prices. A very simple example would be a company giving an earnings call, how quickly and accurately after the results are known does the stock price move to reflect the results. If it happens quickly and accurately, the market is efficient, if it takes a long time or is an overcorrection, the market is inefficient. Now expand this concept to all available information at all times for all assets and you roughly have the efficient market hypothesis. Naturally no one thinks that the market is perfectly efficient at all times, but depending on how clear of a signal there is based on available information, the market can be really darn efficient at times.
  - foldr 2y ago
    So it is like the "Efficient Code Hypothesis"? No-one thinks that all code is efficient, but some code can be efficient sometimes.
    - chii 2y ago
      except in the case of the efficient market, if somebody manages to find some inefficiency, they can stand to profit off it by arbitraging that inefficiency (until it disappears). So it's not quite the same as code inefficiency, unless an engineer could reap the reward for the fixing of said inefficiency.
      - foldr 2y ago
        Ah, so it is like the "Bug Free Code Hypothesis". If someone is paid to write code, then theoretically that code should be making money for someone, and it should be making them more money if all the bugs were fixed.
foldr 2y ago
>But they trend toward efficiency over time The trouble is that, even if this is true, there is no theoretical upper bound on how long it can take. If "markets trend to efficiency" means "don't worry, wait a few years and this inefficient market will be efficient again", then that's one thing. If it could take a couple of hundred years, that's quite another. As Keynes famously put it: > In the long run, we're all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again. There's an interesting analogy with non-Turing-complete programming languages that guarantee program termination. In the real world, a guarantee that a program will terminate eventually is often not particularly useful. What we really want is a guarantee that it will terminate within some reasonable period of time.
dredmorbius 2y ago
Fama himself proposed the efficient markets hypothesis, to some acclaim: EMH is the closest finance has to a “theory of everything”, and won Fama the Nobel Prize for Economics in 2013. But it remains as controversial today as it did when Fama first proposed it half a century ago. (From TFA.) The fact that the hypothesis's own formulator and presumably chief cheerleader now has his doubts is worthy of comment.
- yzydserd 2y ago
  Because "now has his doubts" adds a temporal change that's incorrect. There is nothing in the article that says he's "now" had a suddent shift. He has formed no new "doubts". Fama has always made the distinction that it's a hypothesis, not reality. e.g. 'I start my class every year by saying, “These are models. And the reason we call them models is that they’re not 100 percent true. If they were, we would call them reality, not models'. https://www.minneapolisfed.org/article/2007/interview-with-eugene-fama https://www.minneapolisfed.org/article/2007/interview-with-e... So I agree with the GP, "I don’t know why Eugene Fama saying this in 2024 is considered news."
  - dredmorbius 2y ago
    The context of the headline is a current interview with Fama, and the fact that the conversation focuses largely on EMH. Which makes litigating of the title tedious, and failing to fullfil HN's objective of satisfying intellectual curiosity. Dang explains this (in a somewhat different context, but otherwise relevantly) here: <https://news.ycombinator.com/item?id=39237551 https://news.ycombinator.com/item?id=39237551>
- em500 2y ago
  Fama's actual position was of course more nuanced than simply declaring that "markets are efficient". His key EMH paper [1] notes that a generic formulation of the EMH, that security prices at any time "fully reflect" all available information is untestable: you need narrow down the information set and the pathways in which they are reflected in prices. The paper goes over various technical definitions of "efficiency" and concludes from reviewing the empirical literature (in 1970) that no evidence against certain formulations (weak, semi-strong) of the EMH has been found/published. I don't think it's fair to characterize Fama as "chief cheerleader" of the EMH, but the papers are there for the readers to judge for themselves. [1] https://www.jstor.org/stable/2325486 https://www.jstor.org/stable/2325486, http://efinance.org.cn/cn/fm/Efficient%20Capital%20Markets%20A%20Review%20of%20Theory%20and%20Empirical%20Work.pdf http://efinance.org.cn/cn/fm/Efficient%20Capital%20Markets%2...
frereubu 2y ago
There are a substantial minority of people, mainly on the political left in my personal experience, who characterise capitalists / economists as using theories where the market / consumers are perfectly efficient. To me it seems one of those phenomenons where people want to have an opinion on a complex subject, but to do that they need to simplify it to an extent that makes it a completely innacurate caricature, often based on information that's many decades out of date. It drives a friend of mine - who's an experienced economist that builds models of economies - absolutely mad when people blithely say "but of course you believe that people act rationally and markets are efficient".
- CuriouslyC 2y ago
  Macro-economic forecasting mostly works but the size of the error bars on the computations are directly proportional to the potential informativeness of the forecast. Micro-economics is a bunch of toy and niche models, where the accuracy of the model is generally inversely correlated with how broadly applicable it is. Economic theory is kind of bullshit, they're building predictive models of enormous complex systems and trying to ascribe meaning, the models can be "ok" but the meaning the economists give is personally biased hand waiving about 100% of the time.
  - frereubu 2y ago
    I kind of feel like your second paragraph is helping prove my point. And in my experience the people who build these models are very aware of their limitations (even if some of them do then go on to make overly broad conclusions for publication).
    - CuriouslyC 2y ago
      The problem is that economists love to ascribe meaning and make confident statements about causality in order to promote personal ideology rather than let the models speak for themselves. These models predict behavior within a narrow range of conditions, but that doesn't tell you anything about the underlying systems. You can model any function over a restricted domain using polynomials, but that doesn't mean that polynomial function is the ground truth of the universe.
jampekka 2y ago
> Yes, obviously markets aren’t perfectly efficient and nobody believes they are. And yet all the currently popular theories (and narratives) of economics are founded on that assumption. The F-twist is really someting to behold, especially as the theories don't even work.
- pembrook 2y ago
  While this is the “armchair internet commenter” narrative I was talking about that everybody has parroted going back to the news group days, it just isn’t true. Do you actually believe everyone in the entire field of economics believes people are robots? Or is it just convenient for you to hold that belief since it allows you dismiss an entire field of human endeavor in one sentence?
  - jampekka 2y ago
    > Do you actually believe everyone in the entire field of economics believes people are robots? They don't, but a lot of them work (and preach) as if they are. This is not perculiar to economics, but rather a general practice of scientific programmes in the Lakatosian sense. But few fields cause such harm with and are so politically motivated to protect their core assumptions.
- mikea1 2y ago
  Popular with whom? Newtonian physics is 'popular' because it is easy to grasp with a high school education. Likewise, the theories of the early David Ricardo era are easy to understand, maybe popular, but not current with academics or practitioners.
  - jampekka 2y ago
    E.g. DSGE models are still rather popular with academics and practitioners. And the classical economics is largely how economists popularize their field and justify policy.
lenerdenator 2y ago
> Maybe 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. Because there are still significant numbers of people, many of whom are in positions of power, who think that increases in market efficiency solve all problems in a society. When you have people thinking that shortages of things like "food", "medicine", "shelter", and "water" can be solved by simply adjusting prices until some people can no longer participate in the market, you don't have a hypothesis, you have a cargo cult, and a psychopathic one at that.
eqvinox 2y ago
It's the same as "trickle-down economics", known to be untrue but the original belief is memetically stronger and sticks around. Simple "truths" are easier to believe in... (and easier to regurgitate in short-cycle attention[-span]-deficit news)
- TeaBrain 2y ago
  It's not the same at all. Efficient Market Hypothesis is the actual given name of an economic hypothesis. "Trickle Down" economics is a derogatory term applied to a number of controversial economic policies, by opponent of the policies.
  - eqvinox 2y ago
    The point of discussion was about how "this is a revelation to…someone?" My response was concerning concepts sticking around in wider popular discourse despite being known to not apply particularly well. Did you read past the first 6-8 words?
gmd63 2y ago
They don't seem to. People who exploit the reality of markets, that they are vulnerable to hype and speculaiton, seem to run away with more and more money, leading more and more people to engage in fraudulent SPAC dumps, meme stocks, lobbying for Trumpian deregulation, Tesla levels of fanbase engineering, and wash trading crypto coins. The market is rife with information asymmetry that seems to be increasing, and for it to trend toward efficiency, we would need that to be trending downward.

littlestymaar 2y ago

100 year? Did I accidentally wake up in 2070 without realizing?

pembrook 2y ago
It 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.
    - datavirtue 2y ago
      The list of technologies adopted by the entire tech industry that are far removed or completely miss the point of their inventor is very long.
Terr_ 2y ago
Not OP, but I found an interesting list of works/events [0] indicating that the ideas were in circulation well before 1970. [0] http://www.e-m-h.org/history.html http://www.e-m-h.org/history.html

jongjong 2y ago

I understand that economists are essentially saying that the markets are efficient in the sense that public information is factored into the price of assets in real time. My issue with this idea is that many human beliefs are founded on collective delusions. The market can stay irrational longer than you can stay solvent. So the distinction in the definitions of efficiency doesn't matter since public information and knowledge is highly flawed. What does it mean if incorrect assumptions are factored into the price? It doesn't make sense to call that efficient.

TheOtherHobbes 2y ago
It doesn't make sense because it's a dogma used for political ends, not science. I suppose that's efficient in its own way, if you're one of the relatively few oligarchs and wannabes who benefit from it. To anyone rational and politically literate, these and other expedient mainstream superstitions are obvious nonsense.
- jongjong 2y ago
  I guess it's efficient in terms of ensuring that the prices of assets reflect the social conditioning and incentive structures laid out by the overarching legal and monetary system.

ksynwa 2y ago

> But they trend toward efficiency over time. What does efficiency mean here? And can you support this claim?

Etheryte 2y ago
Simply reading an introductory article on the efficient market hypothesis would be a good starting point here, because both of these are basic principles. Efficiency in this context means how quickly and accurately the market incorporates information into asset prices. A very simple example would be a company giving an earnings call, how quickly and accurately after the results are known does the stock price move to reflect the results. If it happens quickly and accurately, the market is efficient, if it takes a long time or is an overcorrection, the market is inefficient. Now expand this concept to all available information at all times for all assets and you roughly have the efficient market hypothesis. Naturally no one thinks that the market is perfectly efficient at all times, but depending on how clear of a signal there is based on available information, the market can be really darn efficient at times.
- foldr 2y ago
  So it is like the "Efficient Code Hypothesis"? No-one thinks that all code is efficient, but some code can be efficient sometimes.
  - chii 2y ago
    except in the case of the efficient market, if somebody manages to find some inefficiency, they can stand to profit off it by arbitraging that inefficiency (until it disappears). So it's not quite the same as code inefficiency, unless an engineer could reap the reward for the fixing of said inefficiency.
    - foldr 2y ago
      Ah, so it is like the "Bug Free Code Hypothesis". If someone is paid to write code, then theoretically that code should be making money for someone, and it should be making them more money if all the bugs were fixed.

foldr 2y ago

>But they trend toward efficiency over time The trouble is that, even if this is true, there is no theoretical upper bound on how long it can take. If "markets trend to efficiency" means "don't worry, wait a few years and this inefficient market will be efficient again", then that's one thing. If it could take a couple of hundred years, that's quite another. As Keynes famously put it: > In the long run, we're all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again. There's an interesting analogy with non-Turing-complete programming languages that guarantee program termination. In the real world, a guarantee that a program will terminate eventually is often not particularly useful. What we really want is a guarantee that it will terminate within some reasonable period of time.

dredmorbius 2y ago

Fama himself proposed the efficient markets hypothesis, to some acclaim: EMH is the closest finance has to a “theory of everything”, and won Fama the Nobel Prize for Economics in 2013. But it remains as controversial today as it did when Fama first proposed it half a century ago. (From TFA.) The fact that the hypothesis's own formulator and presumably chief cheerleader now has his doubts is worthy of comment.

yzydserd 2y ago
Because "now has his doubts" adds a temporal change that's incorrect. There is nothing in the article that says he's "now" had a suddent shift. He has formed no new "doubts". Fama has always made the distinction that it's a hypothesis, not reality. e.g. 'I start my class every year by saying, “These are models. And the reason we call them models is that they’re not 100 percent true. If they were, we would call them reality, not models'. https://www.minneapolisfed.org/article/2007/interview-with-eugene-fama https://www.minneapolisfed.org/article/2007/interview-with-e... So I agree with the GP, "I don’t know why Eugene Fama saying this in 2024 is considered news."
- dredmorbius 2y ago
  The context of the headline is a current interview with Fama, and the fact that the conversation focuses largely on EMH. Which makes litigating of the title tedious, and failing to fullfil HN's objective of satisfying intellectual curiosity. Dang explains this (in a somewhat different context, but otherwise relevantly) here: <https://news.ycombinator.com/item?id=39237551 https://news.ycombinator.com/item?id=39237551>
em500 2y ago
Fama's actual position was of course more nuanced than simply declaring that "markets are efficient". His key EMH paper [1] notes that a generic formulation of the EMH, that security prices at any time "fully reflect" all available information is untestable: you need narrow down the information set and the pathways in which they are reflected in prices. The paper goes over various technical definitions of "efficiency" and concludes from reviewing the empirical literature (in 1970) that no evidence against certain formulations (weak, semi-strong) of the EMH has been found/published. I don't think it's fair to characterize Fama as "chief cheerleader" of the EMH, but the papers are there for the readers to judge for themselves. [1] https://www.jstor.org/stable/2325486 https://www.jstor.org/stable/2325486, http://efinance.org.cn/cn/fm/Efficient%20Capital%20Markets%20A%20Review%20of%20Theory%20and%20Empirical%20Work.pdf http://efinance.org.cn/cn/fm/Efficient%20Capital%20Markets%2...

frereubu 2y ago

There are a substantial minority of people, mainly on the political left in my personal experience, who characterise capitalists / economists as using theories where the market / consumers are perfectly efficient. To me it seems one of those phenomenons where people want to have an opinion on a complex subject, but to do that they need to simplify it to an extent that makes it a completely innacurate caricature, often based on information that's many decades out of date. It drives a friend of mine - who's an experienced economist that builds models of economies - absolutely mad when people blithely say "but of course you believe that people act rationally and markets are efficient".

CuriouslyC 2y ago
Macro-economic forecasting mostly works but the size of the error bars on the computations are directly proportional to the potential informativeness of the forecast. Micro-economics is a bunch of toy and niche models, where the accuracy of the model is generally inversely correlated with how broadly applicable it is. Economic theory is kind of bullshit, they're building predictive models of enormous complex systems and trying to ascribe meaning, the models can be "ok" but the meaning the economists give is personally biased hand waiving about 100% of the time.
- frereubu 2y ago
  I kind of feel like your second paragraph is helping prove my point. And in my experience the people who build these models are very aware of their limitations (even if some of them do then go on to make overly broad conclusions for publication).
  - CuriouslyC 2y ago
    The problem is that economists love to ascribe meaning and make confident statements about causality in order to promote personal ideology rather than let the models speak for themselves. These models predict behavior within a narrow range of conditions, but that doesn't tell you anything about the underlying systems. You can model any function over a restricted domain using polynomials, but that doesn't mean that polynomial function is the ground truth of the universe.

jampekka 2y ago

> Yes, obviously markets aren’t perfectly efficient and nobody believes they are. And yet all the currently popular theories (and narratives) of economics are founded on that assumption. The F-twist is really someting to behold, especially as the theories don't even work.

pembrook 2y ago
While this is the “armchair internet commenter” narrative I was talking about that everybody has parroted going back to the news group days, it just isn’t true. Do you actually believe everyone in the entire field of economics believes people are robots? Or is it just convenient for you to hold that belief since it allows you dismiss an entire field of human endeavor in one sentence?
- jampekka 2y ago
  > Do you actually believe everyone in the entire field of economics believes people are robots? They don't, but a lot of them work (and preach) as if they are. This is not perculiar to economics, but rather a general practice of scientific programmes in the Lakatosian sense. But few fields cause such harm with and are so politically motivated to protect their core assumptions.
mikea1 2y ago
Popular with whom? Newtonian physics is 'popular' because it is easy to grasp with a high school education. Likewise, the theories of the early David Ricardo era are easy to understand, maybe popular, but not current with academics or practitioners.
- jampekka 2y ago
  E.g. DSGE models are still rather popular with academics and practitioners. And the classical economics is largely how economists popularize their field and justify policy.

lenerdenator 2y ago

> Maybe 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. Because there are still significant numbers of people, many of whom are in positions of power, who think that increases in market efficiency solve all problems in a society. When you have people thinking that shortages of things like "food", "medicine", "shelter", and "water" can be solved by simply adjusting prices until some people can no longer participate in the market, you don't have a hypothesis, you have a cargo cult, and a psychopathic one at that.

eqvinox 2y ago

It's the same as "trickle-down economics", known to be untrue but the original belief is memetically stronger and sticks around. Simple "truths" are easier to believe in... (and easier to regurgitate in short-cycle attention[-span]-deficit news)

TeaBrain 2y ago
It's not the same at all. Efficient Market Hypothesis is the actual given name of an economic hypothesis. "Trickle Down" economics is a derogatory term applied to a number of controversial economic policies, by opponent of the policies.
- eqvinox 2y ago
  The point of discussion was about how "this is a revelation to…someone?" My response was concerning concepts sticking around in wider popular discourse despite being known to not apply particularly well. Did you read past the first 6-8 words?

gmd63 2y ago

They don't seem to. People who exploit the reality of markets, that they are vulnerable to hype and speculaiton, seem to run away with more and more money, leading more and more people to engage in fraudulent SPAC dumps, meme stocks, lobbying for Trumpian deregulation, Tesla levels of fanbase engineering, and wash trading crypto coins. The market is rife with information asymmetry that seems to be increasing, and for it to trend toward efficiency, we would need that to be trending downward.