4 ms·

Perfect information may not have been the right term. Steve Keen devotes a the second half of chapter 11 in Debunking Economics to the EMH. The core issues are

Perfect information may not have been the right term. Steve Keen devotes a the second half of chapter 11 in Debunking Economics to the EMH. The core issues are that the empirical data does not support it and that the maths behind it is all based on the assumptions that everyone can borrow freely at the same risk free rate and secondly that everyone has the same expectations ("homogenity of investor expectations: investors are assumed to agree on the prospects of various instruments - the expected values, standard deviations and correlation coefficients..." - Sharpe 1964 quoted in Debunking Economics 2011.) That the EMH may be false does not mean that I believe I will necessarily win any more than the fact that Poker is significantly a game of skill means that I would necessarily win. I can be outplayed and/or have luck against me. But I wouldn't play for significant money unless I strongly believed that I had the advantage, the same is true for the market.

yummyfajitas 13y ago
What empirical data disagrees with the EMH? I also have no idea why you believe the EMH requires investors to agree on the prospects of various instruments. It doesn't. If it did, the EMH would be a "no one ever trades" theorem. If the EMH were false, a trading strategy generating above-market (risk-adjusted) returns over the long haul would exist. Claiming such a strategy exists is far more plausible if you've already traded it and won.
- mistermann 13y ago
  Would wide swings in the price of an individual stock on no material news not suggest that perhaps the market pricing is not perfectly efficient? (And if it doesn't, then I don't think anything could. I mean, that is one of the primary means you would prove it is not efficient, so if you reject that, then there's not much else I could offer you.)
  - Symmetry 13y ago
    The EMH says that the absence of news when news is expected should cause price swings, as well as the presence of news when that news is unexpected. And that the presence of expected news shouldn't cause any price swing.
- josephlord 13y ago
  EMH says more than you can't beat the market. Booms and busts do show inefficiencies. A trading strategy generating above-market (risk-adjusted) returns may be a proof of the problems in the EMH but it isn't the only one. Also once declared it may no longer be an effective strategy. It also isn't proof because it is impossible to prove that success over n years proves success over n+1 years. However how about asking Warren Buffet if the EMH is true, would you accept his track record as proof against the EMH? If not what sort of trading strategy/record would you suggest might constitute the evidence that you are asking for. Going back to my poker example, do you expect me to win the World Series of Poker to prove that Poker isn't just random luck and chance? Is once enough or do I have to repeat it?
  - yummyfajitas 13y ago
    The track record of Warren Buffet and a few others is evidence that the EMH is imperfect. The rarity of Warren Buffet-level investors is evidence that it's still pretty accurate. How does a boom and bust prove the EMH false? Could you explain the mechanics in detail? Going back to your poker example, if top players in poker were rare and gains/losses seemed random, that would be evidence that Poker is mostly just luck.
    - josephlord 13y ago
      I honestly don't understand the proposition that you are making and whether are are actually disagreeing with my previous post or we just have a language issue. My original point was that the EMH is false but that an individual can use it as a reasonable model and therefore are unwise to trade for profit without a particular reason to believe that they have and advantage. If you accept that Warren Buffet and a few others are evidence that the EMH is imperfect (rather than the positive examples of long lucky runs - in a large population you would expect some very long lucky runs) then you are acknowledging the EMH is false. The existence of those who can beat the market is proof, the number of them doesn't matter. Booms and busts are evidence (not proof) against the EMH because efficient accurate prices won't jump suddenly without specific new information about the underlying value of stocks/commodities/derivatives. Given the size of the shifts and that common absence of major news that triggered them I think it is hard to argue that a number of busts are evidence against the EMH. Likewise speculative bubbles that have inflated the value of things to many times their previous value based largely on the expectation of further growth are again evidence (rather than proof) of the flaws in the EMH.
- jbooth 13y ago
  Could you explain that second sentence a bit? I don't see how EMH being wrong implies that there's a strategy that beats the market. Let's say I think the EMH is false, because, I dunno, I think people are irrational and emotional a lot of the time. It doesn't necessarily follow from that that I can beat the market by betting on people being irrational -- irrationality is really hard to predict, people could be irrational in many different directions.
  - yummyfajitas 13y ago
    The EMH does not assert that people are rational. The EMH can be true even if every single person is irrational. http://en.wikipedia.org/wiki/Efficient-market_hypothesis http://en.wikipedia.org/wiki/Efficient-market_hypothesis How it implies there is a strategy to beat the market? Simple. Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated. You can use that knowledge to trade since the people not using that information will give you favorable prices (in this case by shorting AAPL). Ultimately the problem with the EMH is the name. It's a fairly technical result that most people don't understand. People hear "Efficient Markets Hypothesis", they think it means "markets are magic fluffy bunnies that protect puppies from twisted stomachs and cure inequality", and argue against that.
    - natural219 13y ago
      I'm still confused as to what your ultimate point is. Are you saying that nobody has ever made a bet like that before? I made 4x on TSLA earlier this year. I don't claim to have refuted the Efficient Market Hypothesis, I just saw a situation where most institutional investors had a wrong idea and I thought I could beat them. You seem to think that "market is sometimes wrong" somehow implies "you can always beat the market". That's not what we're saying. We are saying the market is clearly wrong often, so there exists some space for speculation arbitrage.
      - onebaddude 13y ago
        >"I made 4x on TSLA earlier this year" This implies that you made the round trip (ie bought and sold). If not, you've made exactly zero. So what was it that you saw, that institutional investors missed, that caused you to buy? What changed with the company's prospects in the past year that caused you to sell recently, and book your profit? Otherwise, you haven't "beaten" anyone.

yummyfajitas 13y ago

What empirical data disagrees with the EMH? I also have no idea why you believe the EMH requires investors to agree on the prospects of various instruments. It doesn't. If it did, the EMH would be a "no one ever trades" theorem. If the EMH were false, a trading strategy generating above-market (risk-adjusted) returns over the long haul would exist. Claiming such a strategy exists is far more plausible if you've already traded it and won.

mistermann 13y ago
Would wide swings in the price of an individual stock on no material news not suggest that perhaps the market pricing is not perfectly efficient? (And if it doesn't, then I don't think anything could. I mean, that is one of the primary means you would prove it is not efficient, so if you reject that, then there's not much else I could offer you.)
- Symmetry 13y ago
  The EMH says that the absence of news when news is expected should cause price swings, as well as the presence of news when that news is unexpected. And that the presence of expected news shouldn't cause any price swing.
josephlord 13y ago
EMH says more than you can't beat the market. Booms and busts do show inefficiencies. A trading strategy generating above-market (risk-adjusted) returns may be a proof of the problems in the EMH but it isn't the only one. Also once declared it may no longer be an effective strategy. It also isn't proof because it is impossible to prove that success over n years proves success over n+1 years. However how about asking Warren Buffet if the EMH is true, would you accept his track record as proof against the EMH? If not what sort of trading strategy/record would you suggest might constitute the evidence that you are asking for. Going back to my poker example, do you expect me to win the World Series of Poker to prove that Poker isn't just random luck and chance? Is once enough or do I have to repeat it?
- yummyfajitas 13y ago
  The track record of Warren Buffet and a few others is evidence that the EMH is imperfect. The rarity of Warren Buffet-level investors is evidence that it's still pretty accurate. How does a boom and bust prove the EMH false? Could you explain the mechanics in detail? Going back to your poker example, if top players in poker were rare and gains/losses seemed random, that would be evidence that Poker is mostly just luck.
  - josephlord 13y ago
    I honestly don't understand the proposition that you are making and whether are are actually disagreeing with my previous post or we just have a language issue. My original point was that the EMH is false but that an individual can use it as a reasonable model and therefore are unwise to trade for profit without a particular reason to believe that they have and advantage. If you accept that Warren Buffet and a few others are evidence that the EMH is imperfect (rather than the positive examples of long lucky runs - in a large population you would expect some very long lucky runs) then you are acknowledging the EMH is false. The existence of those who can beat the market is proof, the number of them doesn't matter. Booms and busts are evidence (not proof) against the EMH because efficient accurate prices won't jump suddenly without specific new information about the underlying value of stocks/commodities/derivatives. Given the size of the shifts and that common absence of major news that triggered them I think it is hard to argue that a number of busts are evidence against the EMH. Likewise speculative bubbles that have inflated the value of things to many times their previous value based largely on the expectation of further growth are again evidence (rather than proof) of the flaws in the EMH.
jbooth 13y ago
Could you explain that second sentence a bit? I don't see how EMH being wrong implies that there's a strategy that beats the market. Let's say I think the EMH is false, because, I dunno, I think people are irrational and emotional a lot of the time. It doesn't necessarily follow from that that I can beat the market by betting on people being irrational -- irrationality is really hard to predict, people could be irrational in many different directions.
- yummyfajitas 13y ago
  The EMH does not assert that people are rational. The EMH can be true even if every single person is irrational. http://en.wikipedia.org/wiki/Efficient-market_hypothesis http://en.wikipedia.org/wiki/Efficient-market_hypothesis How it implies there is a strategy to beat the market? Simple. Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated. You can use that knowledge to trade since the people not using that information will give you favorable prices (in this case by shorting AAPL). Ultimately the problem with the EMH is the name. It's a fairly technical result that most people don't understand. People hear "Efficient Markets Hypothesis", they think it means "markets are magic fluffy bunnies that protect puppies from twisted stomachs and cure inequality", and argue against that.
  - natural219 13y ago
    I'm still confused as to what your ultimate point is. Are you saying that nobody has ever made a bet like that before? I made 4x on TSLA earlier this year. I don't claim to have refuted the Efficient Market Hypothesis, I just saw a situation where most institutional investors had a wrong idea and I thought I could beat them. You seem to think that "market is sometimes wrong" somehow implies "you can always beat the market". That's not what we're saying. We are saying the market is clearly wrong often, so there exists some space for speculation arbitrage.
    - onebaddude 13y ago
      >"I made 4x on TSLA earlier this year" This implies that you made the round trip (ie bought and sold). If not, you've made exactly zero. So what was it that you saw, that institutional investors missed, that caused you to buy? What changed with the company's prospects in the past year that caused you to sell recently, and book your profit? Otherwise, you haven't "beaten" anyone.