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Market Efficiency - You Ask the Wrong Question
Investment Strategy | 8 Comments | Thu 29 Sep 2011
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Analysing arguments from some of the leading practitioners in academia, economics and money management, many of whom traverse all disciplines, this article examines the question: Is the market efficient? The surprising conclusion is that this is the wrong question.



Comments

1.
On 01/10/2011 16:47:50, James East wrote:
There is an observation called 'Pessimistic Meta-Induction' that because even the most seemingly bulletproof scientific theories of times past are eventually proved wrong, we must assume that today’s theories will someday prove wrong as well. EMH is the case under review here. After reading 'The Black Swan' for the second time recently, being a skeptic is really one's only defense and not just a string of data that indicates that something is different. Just because you have seen data for 70-80 years, does not mean those data points are relevant or even fact. Just recall the American turkey that thinks his life is great until the one thousand and first day when it gets its head chopped off. Induction is a process that is helpful in some areas that are stable, like building a structure or learning to play tennis, but not so much in the dynamical finance world. One can assume that the EMH is fairly dead now given events of the last 20 years. But then again, most of us value folks always knew that anyway. However, it will continue to be used and taught, as we do not yet have a replacement to say otherwise – for now. When the new replacement comes, we will start the process over again which will eventually be proven wrong over time.

2.
On 17/10/2011 10:31:35, Paul wrote:
James Mackintosh has an interesting piece 'Irrational regard for economic models' in the FTFM section of the 17th Oct FT. In it Mackintosh refers to the recent Nodel prize winners Thomas Sargent and Chris Sims and their work on Rational Expectations. Mackintosh makes a point which reinforces a statement made in this article: 'Academic economists can offer insights. But investors must realise that the results of economics are not like those of physics. A model from physics can be tested, its simplifications understood, and its results used by engineers to build bridges.

An economics model creates an abstract world,populated by synthetic beings with goals set by the economist. These can be interesting, but tell us little about the real world'.

3.
On 20/10/2011 15:00:57, Paul wrote:
John Kay's piece - The Map is Not the Territory: An Essay on the State of Economics makes some very relevent points on this subject. For example:

'What Lucas means when he asserts that deviations are 'too small to matter' is that attempts to construct general models of deviations from the EMH - by specifying mechanical trading rules or by writing equations to identify bubbles in asset prices - have not met with much success. But this is to miss the point: the expert billiard player plays a nearly perfect game, but it is the imperfections of play between experts that determine result. There is a - trivial - sense in which the deviations from efficient markets are too small to matter - and a more important sense in which these deviations are the principal thing that matters.

The claim that most profit opportunities in business or in securities markets have been taken is justified. But it is the search for profit opportunities that have not been taken that drives business forward, the belief that profit opportunities that have not been arbitraged away still exist that still explains why there is so much trade in securities. Far from being 'too small to matter', these deviations from efficient market assumptions, not necessarily large, are the dynamic of the capitalist economy.'

See:
http://www.johnkay.com/2011/10/04/the-map-is-not-the-territory-an-essay-on-the-state-of-economics



4.
On 25/10/2011 11:08:53, Anonymous wrote:
Interesting in the light of the articles focus on Yacktman versus Sinquefield that over the past 10 years the Yacktman Focused Fund has returned 13% per annum. This ranks them number one among 500 comparable funds and significantly ahead of the S&P which has returned 2.8% per annum

5.
On 01/11/2011 22:36:43, Anonymous wrote:
“We might define an efficient market as one in which price is
within a factor of 2 of value; i.e., the priceis more than half of value and less than twice value. By this definition, I think almost all markets are
efficient almost all of the time. „Almost all‟ means at least 90 percent.”
(Fischer Black, 1986, Journal of Finance 410)

6.
On 03/04/2012 19:03:58, David Horgan wrote:
Anonymous,

I do not think most investors would agree with you that staying within a factor of 2 is an efficient market. e.g. try telling an investor in Irish residential property in 2007 of has seen the price of their investment halve to Dec 2012 that this was & is an efficient market!!

Sorry but those margins for error merely show that an efficient market does not exist IMHO

7.
On 06/07/2012 12:03:05, Paul McNulty wrote:
This link from the 2012 CFA conference is an interview with Gene Fama, probably the biggest proponent of market efficiency. It provides an excellent overview of the case for market efficiency.

http://cfapodcast.smartpros.com/Annual12/Annual_2012_Fama.mp3

8.
On 10/12/2012 11:56:53, Paul McNulty wrote:
An excellent reference for anyone interested in researching the subject of market efficiency and the practical implications:

http://www.ft.com/intl/cms/s/0/8e2ae5b2-3e14-11e2-91cb-00144feabdc0.html#axzz2EeJ5KqSb

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