Re:Why I don't trade stocks and (probably) neither should you
by grey-area on Tuesday December 03, 2013 @07:19AM
(#6839814)
Thanks for the response, I think we'll continue to disagree, however perhaps we just have a different evaluation of the efficiency of markets - this is probably a difference of degree, as I doubt you subscribe to the market always being 100% efficient? Specific examples about stock market crashes or extreme movements modelled by EMH would be more persuasive than discussion of Bitcoin, I've attempted to give one below.
Sumner showed the EMH predicts exactly this, for a certain distribution of information and returns.
Assuming you are only talking about the blog post you linked, I can't see any sort of proof there, there are some hypothetical numbers about Bitcoin plucked out of the air, and he then goes on to assert that EMH is true whatever happens. If a theory is true whatever happens, it is not a useful model for thinking about the world.
If you take the EMH to mean that prices perfectly (or near perfectly) reflect information (public and private) about an asset, I'd say that mortgage CDOs (to pick a historical example) provide a perfect example of prices NOT reflecting all information - Goldman Sachs insured them with AIG knowing that the prices were incorrect days before the bust, but the price didn't reflect this. Given the incredibly broad claims made by EMH (market prices efficiently reflect all information), one counter-example of corruption, euphoria etc etc driving prices rather than underlying value is enough to disprove it, if it is a meaningful model of markets which can make useful predictions. That is why people cite booms and busts as evidence against EMH, because sudden changes in value are often completely unrelated to the consensus price as measured several days later or before, they are caused by panic, irrational behaviour (in aggregate, not just individually), or insider knowledge; information is so unevenly spread in markets, and manipulation pays so well (e.g. LIBOR), that they are nowhere near efficient.
Sumner showed the EMH predicts exactly this, for a certain distribution of information and returns.
Assuming you are only talking about the blog post you linked, I can't see any sort of proof there, there are some hypothetical numbers about Bitcoin plucked out of the air, and he then goes on to assert that EMH is true whatever happens. If a theory is true whatever happens, it is not a useful model for thinking about the world.
If you take the EMH to mean that prices perfectly (or near perfectly) reflect information (public and private) about an asset, I'd say that mortgage CDOs (to pick a historical example) provide a perfect example of prices NOT reflecting all information - Goldman Sachs insured them with AIG knowing that the prices were incorrect days before the bust, but the price didn't reflect this. Given the incredibly broad claims made by EMH (market prices efficiently reflect all information), one counter-example of corruption, euphoria etc etc driving prices rather than underlying value is enough to disprove it, if it is a meaningful model of markets which can make useful predictions. That is why people cite booms and busts as evidence against EMH, because sudden changes in value are often completely unrelated to the consensus price as measured several days later or before, they are caused by panic, irrational behaviour (in aggregate, not just individually), or insider knowledge; information is so unevenly spread in markets, and manipulation pays so well (e.g. LIBOR), that they are nowhere near efficient.