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Thread: Do you believe in the Efficient Market Theory?

  1. #11
    mountain surfing Array nomadic's Avatar
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    Jul 2008


    Efficient market theory is pretty much bullshiet for MORE than 10 years.

    A lot of "academics" in finance (ones who are more focused on consulting fees than actually making a valid hypothesis) supported the EFM just because it meant that their "school of thought" was still valid and useful in making tenure.

    What I just said its pure fact. Cannot be disputed.

    Anyways, IQ and SAT score has a very high correlation with hedge fund manager returns. Just look at Soros.

    The reason Madoff was a hoax was not because he made positive returns. Its because HE ALWAYS MADE THE EXACT SAME RETURN YEAR OVER YEAR with zero volatility. That article is partly disigenuous in their description of why Madoff should have set off alarm bells.

    Seriously though, people knew the EFM was crap more than 10 years ago. It's just that some academics finally tried to implement their theory into the real world and found out they were wrong in the past 10 years. Its always okay to have stupid people in the market though, because those are the ones you make money off of. Those academics should stay away from finance/economics, and just stick to something like administration.

    This is pretty much my theory about EFM after having studied Economics at Berkeley and University of Chicago. Of course, along the way I have been taught by many really good professors who knew EFM was wrong, but just politically, they didn't want to piss of their colleagues who they depend on for research quotes. Which is just a way for them to make a living. Which is perfectly valid IMO, seeing how most academia is. As long as they knew it was wrong inside and didn't talk too much about it to their students.

  2. #12
    Babylon Candle Array Venom's Avatar
    Join Date
    Feb 2008
    1w9 sp/sx


    so heres a fun one:

    what are the consequences of EFM being wrong? how should our education of economincs, public policy etc be affected?

  3. #13
    pathwise dependent Array FDG's Avatar
    Join Date
    Aug 2007


    EFM comes in weak and strong form. In both cases, we cannot say that the theory incorrect, but it can be said that it provides zero information as far as our actions go: nobody has ever precise over which time-scale the efficient market hypothesis would or would not work; it may very well be that, for every given portfolio X, the excess return is zero asymptotically; but, as Keynes said, since in the long run we are all dead, then there is no reason why we shouldn't bet (unless the process was thought about as being scale-invariant, which would simply make the theory false). You can look at it either as a tautological truth, or as something completely false, but operationally nothing will change.

    what are the consequences of EFM being wrong? how should our education of economincs, public policy etc be affected?
    Well, "fortunately", stochastic-theoretical finance is not embedded yet into the more traditional economic disciplines, so the incorrectness of that hypothesis isn't going to affect them.
    ENTj 7-3-8 sx/sp

  4. #14
    Senior Member Array Rangler's Avatar
    Join Date
    Jan 2009


    There is legitimate evidence for both the efficiency and inefficiency of markets. I think it comes down to perception. I've conclude for myself that the actual degree of market efficiency is less than Efficient Market Theory, but greater than the efficiency of government. This leads me to support more centrist approaches politically.

  5. #15
    Nerd King Usurper Array Edgar's Avatar
    Join Date
    Oct 2008


    Quote Originally Posted by TwinkleToes View Post

    There is now widespread acceptance that investors can behave irrationally, creating very large anomalies.
    People acting irrationally? Why I never!

    You always have to add the human element (i.e. irrationality, emotions, stupid mistakes) into the equation whenever there are humans involved.
    Listen to me, baby, you got to understand, you're old enough to learn the makings of a man.

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