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The efficient market hypothesis — pseudoscientific mumbo-jumbo​

from Lars Syll

The efficient market hypothesis — EMH — argues there is no free lunch and prices are ‘right.’ Well, as we all know, that is not true. dogNoise does influence asset prices and the law of one price is blatantly violated again and again.

Of course, THERE ARE IDIOTS, as Larry Summers once (in)famously put it. When visiting Chicago, look around …

The price is often wrong, and sometimes very wrong … If policy-makers simply take it as a matter of faith that prices are always right, they will never see any need to take preventive action. But once we grant that bubbles are possible, and the private sector appears to be feeding the frenzy, it can make sense for policy-makers to lean against the wind in some way.

Central banks around the world have had to take extraordinary measures to help economies recover from the financial crisis. The same people​ who complain most about these extraordinary measures​ are also those who would object to relatively minor steps to reduce the likelihood of another catastrophe. That is simply irrational.

Richard Thaler

  1. Prof James Beckman, Germany
    April 6, 2018 at 5:53 pm

    “It is what it is”: sounds like Asian thought, doesn’t it? And that’s point when market participants do whatever they do–the rest is theology, is it not?

  2. April 6, 2018 at 6:39 pm

    Stupidity or mendacity? Steve Keen has struggled with that question for some time. It turns out these two are closely linked. When Krugman refuses to lift a finger to learn dynamic systems and nonlinear modeling is he being stupid, lazy, pugnacious or mendacious? I’d say all the above. Same for policy makers: act now, think later. Even better if acting now serves personal goals; re-election, Cush public sector appointment, president of Harvard, whatever. We seriously need congressional hearings featuring Kelton, Keen, Hudson, Werner, Pettifor. We could invite Krugman and Summers, but they’d likely demur, fearful of how they’d stack up. Oh well.

  3. April 7, 2018 at 4:52 am

    If markets were ‘efficient’ there would be no financial crashes. QED

    • Prof James Beckman, Germany
      April 7, 2018 at 10:46 am

      Geof, one can also define markets in terms of winners & losers. In the animal world the winner is the mating male while the loser is the non-mating male whose line will die out. Don’t firms also do the same, whether by often nasty private buyouts or perhaps softer on employment acquisition by another corporation?

    • April 7, 2018 at 12:04 pm


  4. patrick newman
    April 7, 2018 at 12:13 pm

    I like the idea that markets are some form of wildlife jungle!

    • Prof James Beckman, Germany
      April 7, 2018 at 2:10 pm

      Patrick, you have agreement from a recent Nobel Prize-winning economist who co-wrote a book on the “animal spirits” involved in the build-up to the 2007-08 stock crash.

  5. April 9, 2018 at 6:58 am

    According to French economist Robert Guesnerie, a market is a coordination device in which: a) the agents pursue their own interests and to this end perform economic calculations which can be seen as an operation of optimization and/or maximization; b) the agents generally have divergent interests, which lead them to engage in c) transactions which resolve the conflict by defining a price. Consequently, to use Guesnerie’s words, “a market opposes buyers and sellers, and the prices which resolve this conflict are the input but also, in a sense, the outcome of the agents’ economic calculation.” Focus on the term “economic calculation.” Are humans capable, based on all the findings from sociological, psychological, and historical research of optimization/maximization? Hell, no! Humans disagree about who or what optimizes and how it’s done. Does this make markets impossible? No. But markets will always fail to live up to expectations, many results will be unpredictable and unexpected, and socio-historic information (much of it tacit) is key to saving and making useful whatever benefits of which markets may be capable.

    • Prof James Beckman, Germany
      April 9, 2018 at 7:14 am

      Ken, we can see these words in operation if we walk into any food or clothing shop at the right time. If the salesperson has authority, you can probably negotiate with them over pricing late season clothing or overripe fruit. The latter should be very cheap unless there is a surplus food arrangement with a charity. The former becomes a matter of current sales’ goals versus the possibility of storing for the next season as with good ski boots.
      Our brains are magnificent, but hardly focused in many cases on maximization of profit. Rather we are known to operate by rules: three bruised pears for the price of one; 20% off the price of quality ski boots at the end of ski season. Etc. Or so I have found.

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