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> If you look at a typical discussion of trading here on HN you will see lots of totally uninformed hyperbolic assertions about what goes on in the market. How

by lutusp 13y ago

> If you look at a typical discussion of trading here on HN you will see lots of totally uninformed hyperbolic assertions about what goes on in the market. How everything is rigged and how corrupt the players are. Yes, one does see such remarks, but an excellent counterargument is almost never heard-- and that is that (a) business leaders aren't stupid and (b) if the equities market was really significantly rigged or inefficient, these people would refuse to raise capital using equities. The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true.

gnaritas 13y ago
> The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true. That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked. Markets are not efficient and all data is not priced in. Information is not absorbed quickly into the market so inefficiencies crop up everywhere all the time, those are the profit opportunities that traders make a living off of. If EMH were correct, the systematic risk that crashed the market could not have occurred. Remember, it's a hypothesis, not a theory.
- gbasin 13y ago
  Your understanding of the claims of EMH are flawed. On the other hand, the true claim is not easily tested. The best test exists in the form of looking at how easy it is to turn a consistent profit from transacting in open and liquid financial markets. Answer: not easy
  - gnaritas 13y ago
    Not easy isn't equal to not possible. Math isn't easy for most people, that doesn't disprove math. If the claims of EHM cannot be tested, then EMH is obviously nonsense.
- lutusp 13y ago
  > That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked. Not at all. The EMH isn't falsified by people engaging in widespread cheating, and it isn't falsified by big market reversals driven by public psychology. It could only be falsified by the market's inability to accurately set a price on average, across all equities, perpetually. Does an airline disaster contradict the claim that air travel is safe? No, that can only be contradicted by average flight outcomes. It's the same with the equities market. > Markets are not efficient and all data is not priced in. This claim is obviously contradicted by the fact that people are willing to use equities to raise business capital. If the market wasn't efficient, they would think of another way to raise capital -- something more efficient. That's hardly controversial. > If EMH were correct, the systematic risk that crashed the market could not have occurred. The EMH isn't falsified by cheating. Does the fact that insider trading takes place contradict a hypothesis that a market without cheating is fair and efficient? > Remember, it's a hypothesis, not a theory. Yes, and it can never be a theory in the scientific sense -- there's no way to gather objective data in a controlled way. It will probably remain a hypothesis in a pseudoscientific twilight zone forever. But given all the alternatives, the fact that people invest in the equities market argues for the truth of the EMH -- in an unscientific and dubious way.
  - jjarmusch 13y ago
    > That's hardly controversial. You're right, it's not controversial. It's flatly, inarguably wrong. A business leader would very happily use a broken equity market to raise capital if they believed it was broken in their favor. As a concrete example, if I was running YHOO in the 90s (or CRM in recent years) I'd love the public markets, because people were willing to grossly overpay, which would be a fantastic result for the business, for early investors, for early employees, and for myself personally.
  - darkmighty 13y ago
    Efficient market hypothesis discussions are pointless imo, because it's obviously untrue, and obviously approximately true. It's trivial to create cases for both but there's not a credible test to how good the approximation is, what are it's failure modes and critical points, where the inefficiencies are amplified, and so on. In the end it's just an assumption in economic papers so they can be correct in some sense.
- Guvante 13y ago
  > Markets are not efficient and all data is not priced in EMH says that all publicly available data is priced in. The strongest form claims all data, but no one believes that (insider trading alone debunks it). I would postulate that given the data available right before the crash, you would probably end up with similar results to what the pricing was at the time. Note that one thing people have a hard time understanding with EMH is externalities, such as enthusiasm or whatever the opposite is called for a product or class of product. > those are the profit opportunities that traders make a living off of EMH relies on people making a living to function, the price setters need to do well or else enough won't be attracted to make the market efficient. You are correct that this kind of problem makes anything but the weakest form difficult to prove. > the systematic risk that crashed the market could not have occurred Why? One major factor in the crash was that people started walking away from their homes. Historically this didn't happen. If all of the data points to stability in mortgages, you cannot expect people to divine that problem, nor does the EMH require them too.
  - lutusp 13y ago
    > The strongest form claims all data, but no one believes that (insider trading alone debunks it). Insider trading doesn't "debunk" the EMH, because the EMH is predicated on fair dealing. There's a lot of distorted ideas about the EMH, for example that a market crash, or cheating, disproves it. These events don't disprove the hypothesis.
    - gnaritas 13y ago
      > These events don't disprove the hypothesis. Then the hypothesis is useless and false. You can't claim markets are efficient and then exclude all evidence to the contrary. > because the EMH is predicated on fair dealing Yes, which makes EMH false in the real world. A hypothesis that's only true in an ideal world isn't useful nor is it meaningful in the real world.
      - Guvante 13y ago
        > A hypothesis that's only true in an ideal world isn't useful nor is it meaningful in the real world. You are not treating EMH like you should, think of it as a guideline not a hard and always true rule of life. For instance lets say Telsa is trading for $100 and you think it is worth $50, there are two reasons for this, either: * The market is not efficient and you should take advantage. * The market is efficient and you aren't considering all of the variables. In almost every conceivable case it is the latter. The answer for Tesla is probably optimism for the technology when optimism often drives prices above the otherwise expected value. EMH makes you consider the market as the baseline, which greatly helps steer you towards what is going on.
- wolframarnold 13y ago
  Agreed. In fact markets can from time to time exhibit systemic inefficiencies. What this means is that the very fabric of the market itself can give rise to bubbles or crashes. A brilliant book that I found an eye-opening read is by Didier Sornette, a physicist by training, "Why stock markets crash," circa 2003.
dllthomas 13y ago
"(a) business leaders aren't stupid and (b) if the equities market was really significantly rigged or inefficient, these people would refuse to raise capital using equities." Wouldn't that depend on who the market is stacked for/against, by how much, and what their alternatives are?
- lutusp 13y ago
  But the most basic premise of a fair market is that it's not "stacked" at all -- that everyone has an equal chance to react to market moves and price changes. For example, a business cannot possibly get one cent more than the purchasers of their stock offer in the marketplace, and because of transaction fees, somewhat less. And an investor has the same experience -- he can't possibly get more than the market value of his shares on the day of sale. Brokerage houses are in competition to offer the lowest transaction costs and the most reliable environment for trading. That competition reduces transaction prices for everyone. Conclusion? Not stacked in general. Insider trading is a crime, betting against your own customers is a crime, and these things happen, but they're prosecuted.
  - krisgee 13y ago
    >that everyone has an equal chance to react to market moves and price changes. A rich person or big trading house can buy rack space close to New York or whatever city their market is based on, a regular person cannot. This ability gives a significant advantage to rich people/business owners, therefore the market is not fair at all.
  - dllthomas 13y ago
    I'm not sure just how much I can say, in the context of my employment, so I'm going to drop out here.
justincormack 13y ago
No, whether people finance with equity capital has no bearing on whether markets are fair or efficient. People finance with VC money when there is not even usually a market. People who want capital have little choice, they have to pay the ridiculous fees and have it traded in the existing market. But they don;t really care about the non competitive cartel of investment banks anyway, as running a public company means you can pay your self almost unlimited amounts of the shareholders money anyway. Whats not to like? Who cares if the market is efficient?

by lutusp 13y ago

gnaritas 13y ago

> The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true. That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked. Markets are not efficient and all data is not priced in. Information is not absorbed quickly into the market so inefficiencies crop up everywhere all the time, those are the profit opportunities that traders make a living off of. If EMH were correct, the systematic risk that crashed the market could not have occurred. Remember, it's a hypothesis, not a theory.

gbasin 13y ago
Your understanding of the claims of EMH are flawed. On the other hand, the true claim is not easily tested. The best test exists in the form of looking at how easy it is to turn a consistent profit from transacting in open and liquid financial markets. Answer: not easy
- gnaritas 13y ago
  Not easy isn't equal to not possible. Math isn't easy for most people, that doesn't disprove math. If the claims of EHM cannot be tested, then EMH is obviously nonsense.
lutusp 13y ago
> That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked. Not at all. The EMH isn't falsified by people engaging in widespread cheating, and it isn't falsified by big market reversals driven by public psychology. It could only be falsified by the market's inability to accurately set a price on average, across all equities, perpetually. Does an airline disaster contradict the claim that air travel is safe? No, that can only be contradicted by average flight outcomes. It's the same with the equities market. > Markets are not efficient and all data is not priced in. This claim is obviously contradicted by the fact that people are willing to use equities to raise business capital. If the market wasn't efficient, they would think of another way to raise capital -- something more efficient. That's hardly controversial. > If EMH were correct, the systematic risk that crashed the market could not have occurred. The EMH isn't falsified by cheating. Does the fact that insider trading takes place contradict a hypothesis that a market without cheating is fair and efficient? > Remember, it's a hypothesis, not a theory. Yes, and it can never be a theory in the scientific sense -- there's no way to gather objective data in a controlled way. It will probably remain a hypothesis in a pseudoscientific twilight zone forever. But given all the alternatives, the fact that people invest in the equities market argues for the truth of the EMH -- in an unscientific and dubious way.
- jjarmusch 13y ago
  > That's hardly controversial. You're right, it's not controversial. It's flatly, inarguably wrong. A business leader would very happily use a broken equity market to raise capital if they believed it was broken in their favor. As a concrete example, if I was running YHOO in the 90s (or CRM in recent years) I'd love the public markets, because people were willing to grossly overpay, which would be a fantastic result for the business, for early investors, for early employees, and for myself personally.
- darkmighty 13y ago
  Efficient market hypothesis discussions are pointless imo, because it's obviously untrue, and obviously approximately true. It's trivial to create cases for both but there's not a credible test to how good the approximation is, what are it's failure modes and critical points, where the inefficiencies are amplified, and so on. In the end it's just an assumption in economic papers so they can be correct in some sense.
Guvante 13y ago
> Markets are not efficient and all data is not priced in EMH says that all publicly available data is priced in. The strongest form claims all data, but no one believes that (insider trading alone debunks it). I would postulate that given the data available right before the crash, you would probably end up with similar results to what the pricing was at the time. Note that one thing people have a hard time understanding with EMH is externalities, such as enthusiasm or whatever the opposite is called for a product or class of product. > those are the profit opportunities that traders make a living off of EMH relies on people making a living to function, the price setters need to do well or else enough won't be attracted to make the market efficient. You are correct that this kind of problem makes anything but the weakest form difficult to prove. > the systematic risk that crashed the market could not have occurred Why? One major factor in the crash was that people started walking away from their homes. Historically this didn't happen. If all of the data points to stability in mortgages, you cannot expect people to divine that problem, nor does the EMH require them too.
- lutusp 13y ago
  > The strongest form claims all data, but no one believes that (insider trading alone debunks it). Insider trading doesn't "debunk" the EMH, because the EMH is predicated on fair dealing. There's a lot of distorted ideas about the EMH, for example that a market crash, or cheating, disproves it. These events don't disprove the hypothesis.
  - gnaritas 13y ago
    > These events don't disprove the hypothesis. Then the hypothesis is useless and false. You can't claim markets are efficient and then exclude all evidence to the contrary. > because the EMH is predicated on fair dealing Yes, which makes EMH false in the real world. A hypothesis that's only true in an ideal world isn't useful nor is it meaningful in the real world.
    - Guvante 13y ago
      > A hypothesis that's only true in an ideal world isn't useful nor is it meaningful in the real world. You are not treating EMH like you should, think of it as a guideline not a hard and always true rule of life. For instance lets say Telsa is trading for $100 and you think it is worth $50, there are two reasons for this, either: * The market is not efficient and you should take advantage. * The market is efficient and you aren't considering all of the variables. In almost every conceivable case it is the latter. The answer for Tesla is probably optimism for the technology when optimism often drives prices above the otherwise expected value. EMH makes you consider the market as the baseline, which greatly helps steer you towards what is going on.
wolframarnold 13y ago
Agreed. In fact markets can from time to time exhibit systemic inefficiencies. What this means is that the very fabric of the market itself can give rise to bubbles or crashes. A brilliant book that I found an eye-opening read is by Didier Sornette, a physicist by training, "Why stock markets crash," circa 2003.

dllthomas 13y ago

"(a) business leaders aren't stupid and (b) if the equities market was really significantly rigged or inefficient, these people would refuse to raise capital using equities." Wouldn't that depend on who the market is stacked for/against, by how much, and what their alternatives are?

lutusp 13y ago
But the most basic premise of a fair market is that it's not "stacked" at all -- that everyone has an equal chance to react to market moves and price changes. For example, a business cannot possibly get one cent more than the purchasers of their stock offer in the marketplace, and because of transaction fees, somewhat less. And an investor has the same experience -- he can't possibly get more than the market value of his shares on the day of sale. Brokerage houses are in competition to offer the lowest transaction costs and the most reliable environment for trading. That competition reduces transaction prices for everyone. Conclusion? Not stacked in general. Insider trading is a crime, betting against your own customers is a crime, and these things happen, but they're prosecuted.
- krisgee 13y ago
  >that everyone has an equal chance to react to market moves and price changes. A rich person or big trading house can buy rack space close to New York or whatever city their market is based on, a regular person cannot. This ability gives a significant advantage to rich people/business owners, therefore the market is not fair at all.
- dllthomas 13y ago
  I'm not sure just how much I can say, in the context of my employment, so I'm going to drop out here.

justincormack 13y ago

No, whether people finance with equity capital has no bearing on whether markets are fair or efficient. People finance with VC money when there is not even usually a market. People who want capital have little choice, they have to pay the ridiculous fees and have it traded in the existing market. But they don;t really care about the non competitive cartel of investment banks anyway, as running a public company means you can pay your self almost unlimited amounts of the shareholders money anyway. Whats not to like? Who cares if the market is efficient?