Dan Davies

Bedtime for market efficiency by Dan Davies

"People have been calling on the economics profession to make some fairly serious revisions to the way the subject is taught.... I think there’s one thing that really can’t be denied: when this particular phoenix rises from the flames, it ought to leave the Efficient Markets Hypothesis back in the ash pit.... Efficient markets gets a chapter of its own in John Quiggin’s Zombie Economics as an idea that won’t go away, no matter how thoroughly it’s refuted.... The temptation will be to try and avoid going “cold turkey” on efficient markets, by reducing the overarching claims, but hanging on to the general story that markets are 'broadly efficient'.... The hypothesis that there is no information in the past history of share prices which can be used to predict the future... doesn’t work.... Companies like AQR have been offering funds based on them, and generally outperforming, for ages. And when you get to anything stronger than the very-weak form versions, the performance is really quite embarrassing. Robert Shiller’s share of the Nobel Prize was for noticing that securities prices are, in general, much too volatile to make sense as forecasts.... DeLong, Summers, Shleifer & Waldmann have shown that there is no real theoretical basis to the idea that 'traders competing against each other make markets efficient'--it’s just as likely that they create meaningless volatility. Market prices are... a weighted average of the views of a large group of well-resourced and intelligent people with an incentive to get things right. But nobody would build a theory of politics around the infallibility of opinion polls.... All that’s really left of market efficiency is a sort of woolly idea that 'it’s difficult to make money in the stock market'. Which it is, but it’s pretty difficult to make money in any other way too, a fact which has fewer implications for fundamental economic truth than you’d think..."

 (via DeLong)