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First, from Wikipedia: "Empirical analyses have consistently found problems with the efficient-market hypothesis, the most consistent being that stocks with low

First, from Wikipedia: "Empirical analyses have consistently found problems with the efficient-market hypothesis, the most consistent being that stocks with low price to earnings (and similarly, low price to cash-flow or book value) outperform other stocks." At the very least, accept that it's not such a clear case as you present it to be. But then, what about HFT arbitrage, low P/E ratios, choosing underperforming companies to take advantage of regression to the mean, Piotroski's F-Score, Graham-style value investing, bait and switch dumping, swing trading, the very real problem of pricing goodwill and non-material resources...? If not undermining weak EMH, at least they cast doubts over the strong forms. Or they should. Do also read John Carter's Mastering the Trade for some examples on how market inefficiencies can be exploited reliably. Supposedly (seen in Wikipedia, so I'm not that confident) market crashes are interpreted to be impossible under strong EMH (and yeah, the bubbles would definitely falsify them), but are allowed in weak EMH to be statistical events of a random process. Now, I've heard an interesting and convincing argument by Steve Keen[1] that the market is not Gaussian noise; it's a fractal process with dimension ~ 1.7 (Gaussian's dimension is 2) whose crashes obey a power law distribution, very different from what a random walk would generate. That falsifies the weak form. > Prove this wrong -- identify a surefire winning stock picking strategy that is immune to the announcement effect and insider trading, that reliably puts its practitioners ahead of market indices. Falsifying EMH does not require such a thing, no more than proving relativity requires observing time dilation at all velocities. This is an onerous, diabolical burden of proof. > Anyone can misbehave in spectacular ways, but those misbehaviors don't falsify the EMH, any more than an airplane crash falsifies theories of aerodynamics. If you had periodic epidemics of plane crashes that were more frequent than expected, sure, you should definitely suspect something's wrong. [1] Yeah, some things he says are somewhat crackpotty, but he's definitely not to be completely dismissed beforehand. I refer to his Behavioural Finance Lectures, published in Youtube.

lutusp 14y ago
>> Prove this wrong -- identify a surefire winning stock picking strategy that is immune to the announcement effect and insider trading, that reliably puts its practitioners ahead of market indices. > Falsifying EMH does not require such a thing ... As a matter of fact, yes, it does. The only acceptable evidence against the EMH is a performance that the EMH cannot accommodate -- a successful strategy for reading and exploiting the market in a way that performs better than market indices. And not just sometimes, but all the time, reliably. Science requires evidence. Evidence in this case means producing results above the norms set by the market averages, and not just sometimes, but all the time. Anything else is empty philosophizing. Performances below the norms can be explained in any number of ways, but above the norms is a different story. And by "above the norms" I don't mean 1/2 the time or 1/2 the practitioners -- that's assured by chance factors. All this talk about the EMH being flawed, not being the whole story, falls down before the fact that no one can invent a strategy to improve on long-term market averages, and that says it all. It is the ultimate evidence in favor of the EMH. If no one can think of a way to read the market to his advantage, better than average performance, without engaging in insider trading or reliance on the announcement effect, then the default assumption is supported. > This is an onerous, diabolical burden of proof. Be that as it may, it is an essential standard of proof. Nothing else matters -- no amount of philosophizing can stand in for actual results. The expert gets up and says, "The EMH is flawed, meaningless, unscientific, wrong, etc., etc.." Someone from the audience says "All right -- prove it. Produce a strategy that beats the market norms." The expert is naturally taken aback -- "Are you serious? What about the EMH? What about the fact that every single strategy that has ever been tried, has failed in the long term?" This is like people in a bar talking about sailing. Any number of ideas about sailing are aired over intoxicating beverages, and it's all very interesting, but since no one goes out on the water, it's completely meaningless.
- meninges 14y ago
  Proving that EMH is false requires revelation of a profitable method or at least a statistically significant edge, which then makes it vulnerable to getting exploited away. It's actually more useful if the public believes in EMH and in traders' best interest to keep their edges secret.
  - lutusp 14y ago
    > Proving that EMH is false requires revelation of a profitable method or at least a statistically significant edge, which then makes it vulnerable to getting exploited away. Yes, true, and such an outcome ironically supports the EMH. > It's actually more useful if the public believes in EMH and in traders' best interest to keep their edges secret. Actually, it is much, much more advantageous for traders to pretend that there is a surefire winning strategy that only they know about. The problem with that plan is the fact that there is no such strategy. How do I know this? If there really was a surefire winning strategy, a trader who controlled it could (and would want to) do without any public involvement, and invest his own funds in private until he became absurdly rich. That's the obvious way to play it -- why share the proceeds, and why risk exposing the method, by dealing with gullible, ungrateful clients? The answer is that those gullible, ungrateful clients are what makes the present system work, not some secret sauce that falsifies the EMH.
    - meninges 14y ago
      We are talking here at such high level abstractions and with stack of presuppositions that it's difficult for me to figure out just where to even begin explaining my point and i question if i even should. If one doesn't know of a 'sure fire winning strategy' (== strong form inefficient market hypothesis ?) ( or just statistically useful may be good enough ) one should not participate in the market in most forms ( which market, participate how ). I've heard it compared to a poker game where if you don't know who the sucker is it's probably you. The general public is misinformed about the markets and gets consistently fleeced yet keeps getting pulled in by dreams of easy money - akin to a lottery. Markets have defined purposes (theoretical, practical, legal) and serve them accordingly. Enriching 'gullible, ungrateful clients' is not the primary purpose. EMH is a useful explanation to the clients why they got fleeced, and i don't want to disprove it. It takes a lot of work to figure out how the lottery works and how to consistently game it. It's just a job.

lutusp 14y ago

>> Prove this wrong -- identify a surefire winning stock picking strategy that is immune to the announcement effect and insider trading, that reliably puts its practitioners ahead of market indices. > Falsifying EMH does not require such a thing ... As a matter of fact, yes, it does. The only acceptable evidence against the EMH is a performance that the EMH cannot accommodate -- a successful strategy for reading and exploiting the market in a way that performs better than market indices. And not just sometimes, but all the time, reliably. Science requires evidence. Evidence in this case means producing results above the norms set by the market averages, and not just sometimes, but all the time. Anything else is empty philosophizing. Performances below the norms can be explained in any number of ways, but above the norms is a different story. And by "above the norms" I don't mean 1/2 the time or 1/2 the practitioners -- that's assured by chance factors. All this talk about the EMH being flawed, not being the whole story, falls down before the fact that no one can invent a strategy to improve on long-term market averages, and that says it all. It is the ultimate evidence in favor of the EMH. If no one can think of a way to read the market to his advantage, better than average performance, without engaging in insider trading or reliance on the announcement effect, then the default assumption is supported. > This is an onerous, diabolical burden of proof. Be that as it may, it is an essential standard of proof. Nothing else matters -- no amount of philosophizing can stand in for actual results. The expert gets up and says, "The EMH is flawed, meaningless, unscientific, wrong, etc., etc.." Someone from the audience says "All right -- prove it. Produce a strategy that beats the market norms." The expert is naturally taken aback -- "Are you serious? What about the EMH? What about the fact that every single strategy that has ever been tried, has failed in the long term?" This is like people in a bar talking about sailing. Any number of ideas about sailing are aired over intoxicating beverages, and it's all very interesting, but since no one goes out on the water, it's completely meaningless.

meninges 14y ago
Proving that EMH is false requires revelation of a profitable method or at least a statistically significant edge, which then makes it vulnerable to getting exploited away. It's actually more useful if the public believes in EMH and in traders' best interest to keep their edges secret.
- lutusp 14y ago
  > Proving that EMH is false requires revelation of a profitable method or at least a statistically significant edge, which then makes it vulnerable to getting exploited away. Yes, true, and such an outcome ironically supports the EMH. > It's actually more useful if the public believes in EMH and in traders' best interest to keep their edges secret. Actually, it is much, much more advantageous for traders to pretend that there is a surefire winning strategy that only they know about. The problem with that plan is the fact that there is no such strategy. How do I know this? If there really was a surefire winning strategy, a trader who controlled it could (and would want to) do without any public involvement, and invest his own funds in private until he became absurdly rich. That's the obvious way to play it -- why share the proceeds, and why risk exposing the method, by dealing with gullible, ungrateful clients? The answer is that those gullible, ungrateful clients are what makes the present system work, not some secret sauce that falsifies the EMH.
  - meninges 14y ago
    We are talking here at such high level abstractions and with stack of presuppositions that it's difficult for me to figure out just where to even begin explaining my point and i question if i even should. If one doesn't know of a 'sure fire winning strategy' (== strong form inefficient market hypothesis ?) ( or just statistically useful may be good enough ) one should not participate in the market in most forms ( which market, participate how ). I've heard it compared to a poker game where if you don't know who the sucker is it's probably you. The general public is misinformed about the markets and gets consistently fleeced yet keeps getting pulled in by dreams of easy money - akin to a lottery. Markets have defined purposes (theoretical, practical, legal) and serve them accordingly. Enriching 'gullible, ungrateful clients' is not the primary purpose. EMH is a useful explanation to the clients why they got fleeced, and i don't want to disprove it. It takes a lot of work to figure out how the lottery works and how to consistently game it. It's just a job.