6 ms·

Can you say for a fact that if they priced at $46 that people would have bought at $46? Markets are highly irrational.

by raganwald 13y ago

Tyrannosaurs 13y ago
> Markets are highly irrational. That depends which recent Nobel Memorial Prize winner you believe.
- pyre 13y ago
  Which one claims that all actors in a market have perfect information?
  - icebraining 13y ago
    I'm guessing parent's talking about Eugene Fama, who shared the prize with Robert Shiller. He doesn't actually claim the markets have perfect information, just that the price always reflects all available information. In essence, you can't "beat the market" consistently, assuming you have the same information.
    - cheald 13y ago
      > assuming you have the same information Which you don't, since Goldman Sachs is always a few milliseconds ahead of everyone else. Given that almost everyone else out there is going to be trading on information that has already been consumed and acted upon by privileged parties, the markets may as well for all intents and purposes be irrational.
- generj 13y ago
  In this world of quant-bots, I don't know how anyone can argue that we have a fully rational market. My understanding is that much of the progress in economics has been merging economics with psychology to identify rational failures.
  - pachydermic 13y ago
    "Homo economicus" is still really important for macroeconomics. The reason for this is pretty simple: designing rich, large models is still hard to do and the practical limitations introduced by basing your assumptions on the idea that people act irrationally instead of rationally can make things too complicated to be of practical use. So in microeconomics or small models, people can practically accept and implement these (pretty obviously true) ideas that people don't behave rationally. But in large scale macroeconomic models it's hard to do. It would certainly be a lot easier if people just acted like computers...
    - icebraining 13y ago
      The issue is not just that models are hard. The claim of some economists is that while people behave irrationally, not everyone behaves irrationally all the time, so the issue is self-correcting as long as you have enough liquidity and participants in the market. It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.
      - pachydermic 13y ago
        If people make biased (http://en.wikipedia.org/wiki/Bias_of_an_estimator http://en.wikipedia.org/wiki/Bias_of_an_estimator) guesses you will still have a problem. I think that's often what's meant by "rational": that people, in aggregate, make unbiased guesses. The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.
      - Symmetry 13y ago
        Most of the time it's like that, but sometimes you have a situation like nominal loss aversion/sticky wages where humans are very consistent about their irrationality and that irrationality has very important effects. http://en.wikipedia.org/wiki/Sticky_wages http://en.wikipedia.org/wiki/Sticky_wages http://econlog.econlib.org/archives/2013/09/why_dont_wages.html http://econlog.econlib.org/archives/2013/09/why_dont_wages.h...
yummyfajitas 13y ago
What does it mean for a market to be "highly irrational"? Normally the term "irrational" is applied to actors, while "efficient" refers to markets. Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.) Incidentally, when an actor behaves irrationally in an efficient market, this happens: https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=0&chvs=Logarithmic&chdeh=0&chfdeh=0&chdet=1383845009163&chddm=415108&chls=IntervalBasedLine&q=FRA:KNG&ntsp=0&ei=YMx7UsClMu-UwQPKXQ https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=0&...
- tedunangst 13y ago
  I believe the counter argument to a money making inefficient market strategy is "I'm just a little guy and the big evil bankers won't let me make money".
- clarky07 13y ago
  I don't know if he is, but I would certainly suggest that markets are not efficient. Not even close. Google had a 40 billion dollar swing in valuation in a day last month. Were they really worth 40 billion more that day? Apple lost 300 billion in market cap in a matter of 6 months. Either they weren't worth that much at the peak, or they weren't worth that little at the bottom. There is no way you could ever convince me that Apple was efficiently priced at both ends (most likely neither end). Knowing that the market is inefficient is not equivalent to knowing which stocks to buy or sell, or when to do so. It doesn't give you a magic formula, but it does give you some idea of what to look for. FWIW, I have done pretty well picking stocks for myself, but I'm far from what I would consider "extremely wealthy". That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.
  - jerf 13y ago
    You seem to be using a definition of "efficient" that has some sort of moral or intuitive meaning. That's not the relevant definition. It's really something more like "the market will not exhibit large-scale persistent arbitrage opportunities", which is why showing the market is inefficient pretty much by definition requires you to produce a method to consistently make substantial quantities of money by exploiting the arbitrage opportunities you found. Market efficiency is not a moral concern; it's more like a physics observation. In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.

Can you say for a fact that if they priced at $46 that people would have bought at $46? Markets are highly irrational.

Tyrannosaurs 13y ago

> Markets are highly irrational. That depends which recent Nobel Memorial Prize winner you believe.

pyre 13y ago
Which one claims that all actors in a market have perfect information?
- icebraining 13y ago
  I'm guessing parent's talking about Eugene Fama, who shared the prize with Robert Shiller. He doesn't actually claim the markets have perfect information, just that the price always reflects all available information. In essence, you can't "beat the market" consistently, assuming you have the same information.
  - cheald 13y ago
    > assuming you have the same information Which you don't, since Goldman Sachs is always a few milliseconds ahead of everyone else. Given that almost everyone else out there is going to be trading on information that has already been consumed and acted upon by privileged parties, the markets may as well for all intents and purposes be irrational.
generj 13y ago
In this world of quant-bots, I don't know how anyone can argue that we have a fully rational market. My understanding is that much of the progress in economics has been merging economics with psychology to identify rational failures.
- pachydermic 13y ago
  "Homo economicus" is still really important for macroeconomics. The reason for this is pretty simple: designing rich, large models is still hard to do and the practical limitations introduced by basing your assumptions on the idea that people act irrationally instead of rationally can make things too complicated to be of practical use. So in microeconomics or small models, people can practically accept and implement these (pretty obviously true) ideas that people don't behave rationally. But in large scale macroeconomic models it's hard to do. It would certainly be a lot easier if people just acted like computers...
  - icebraining 13y ago
    The issue is not just that models are hard. The claim of some economists is that while people behave irrationally, not everyone behaves irrationally all the time, so the issue is self-correcting as long as you have enough liquidity and participants in the market. It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.
    - pachydermic 13y ago
      If people make biased (http://en.wikipedia.org/wiki/Bias_of_an_estimator http://en.wikipedia.org/wiki/Bias_of_an_estimator) guesses you will still have a problem. I think that's often what's meant by "rational": that people, in aggregate, make unbiased guesses. The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.
    - Symmetry 13y ago
      Most of the time it's like that, but sometimes you have a situation like nominal loss aversion/sticky wages where humans are very consistent about their irrationality and that irrationality has very important effects. http://en.wikipedia.org/wiki/Sticky_wages http://en.wikipedia.org/wiki/Sticky_wages http://econlog.econlib.org/archives/2013/09/why_dont_wages.html http://econlog.econlib.org/archives/2013/09/why_dont_wages.h...

yummyfajitas 13y ago

What does it mean for a market to be "highly irrational"? Normally the term "irrational" is applied to actors, while "efficient" refers to markets. Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.) Incidentally, when an actor behaves irrationally in an efficient market, this happens: https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=0&chvs=Logarithmic&chdeh=0&chfdeh=0&chdet=1383845009163&chddm=415108&chls=IntervalBasedLine&q=FRA:KNG&ntsp=0&ei=YMx7UsClMu-UwQPKXQ https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=0&...

tedunangst 13y ago
I believe the counter argument to a money making inefficient market strategy is "I'm just a little guy and the big evil bankers won't let me make money".
clarky07 13y ago
I don't know if he is, but I would certainly suggest that markets are not efficient. Not even close. Google had a 40 billion dollar swing in valuation in a day last month. Were they really worth 40 billion more that day? Apple lost 300 billion in market cap in a matter of 6 months. Either they weren't worth that much at the peak, or they weren't worth that little at the bottom. There is no way you could ever convince me that Apple was efficiently priced at both ends (most likely neither end). Knowing that the market is inefficient is not equivalent to knowing which stocks to buy or sell, or when to do so. It doesn't give you a magic formula, but it does give you some idea of what to look for. FWIW, I have done pretty well picking stocks for myself, but I'm far from what I would consider "extremely wealthy". That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.
- jerf 13y ago
  You seem to be using a definition of "efficient" that has some sort of moral or intuitive meaning. That's not the relevant definition. It's really something more like "the market will not exhibit large-scale persistent arbitrage opportunities", which is why showing the market is inefficient pretty much by definition requires you to produce a method to consistently make substantial quantities of money by exploiting the arbitrage opportunities you found. Market efficiency is not a moral concern; it's more like a physics observation. In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.