5 ms·
Making fun of economists who assume efficient markets is a lot like making fun of physicists who assume frictionless motion. Or computer scientists who assume a
by codeflo 12y ago
Making fun of economists who assume efficient markets is a lot like making fun of physicists who assume frictionless motion. Or computer scientists who assume an infinite Turing tape. Simplifying assumptions can be very useful if you know their limitations.
It seems that in the author's beauty contest game, most people are unable to analyze this game correctly at the top of their head. Maybe some people don't even bother and just pick any random number. But assume that this game is played repeatedly and for real money (like in a stock market). I think people will notice that low numbers consistently win, which will cause a downward trend towards the Nash equilibrium in very few iterations.
- vasilipupkin 12y agoprecisely. In fact, you see it in the markets, even among quantitative Phds, only a very small fraction beats the market. It's broadly efficient, on long enough time scales. It's inefficient on extremely short time scales, which is why HFT works so well.
- mikeash 12y agoIf physicists never turned "frictionless motion" assumptions into useful, accurate predictions, I see no reason not to make fun of them. Physics has a long history of extreme success. Economics, on the other hand, often has more opinions than practitioners, and no physics-level accurate predictions in sight.