Stephanie_Cunnane comments on Rationality Quotes March 2012 - Less Wrong

4 Post author: Thomas 03 March 2012 08:04AM

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Comment author: Stephanie_Cunnane 08 March 2012 10:44:15PM 10 points [-]

Now let's talk about efficient market theory, a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact, one of the economists who won--he shared a Nobel Prize--and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn't quite as efficient as you think, he said, "Well, it's a two-sigma event." And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas--better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.

-Charlie Munger

Comment author: Daniel_Burfoot 11 March 2012 06:41:31PM 8 points [-]

I'm surprised by how consistently misinterpreted the EMH is, even by people with the widest possible perspective on markets and economics. The EMH practically requires that some people make money by trading, because that's the mechanism which causes the market to become efficient. The EMH should really be understood to mean that as more and more money is leached out of the market by speculators, prices become better and better approximations to real net present values.

Comment author: roystgnr 24 March 2012 10:49:20PM 4 points [-]

I've always thought of the Efficient Market Hypothesis as the anti-Tinkerbell: if everybody all starts clapping and believing in it, it dies.

See, for example, every bubble ever. "We don't need to worry about buying that thing for more than it seems to be worth, because prices are going up so we can always resell it for even more than that later!"

Comment author: wedrifid 25 March 2012 07:49:50AM 4 points [-]

See, for example, every bubble ever. "We don't need to worry about buying that thing for more than it seems to be worth, because prices are going up so we can always resell it for even more than that later!"

If they actually believed the market they were trading in was efficient they wouldn't believe that prices would continue to go up. They would expect them to follow the value of capital invested at that level of risk. Further - as applicable to any bubble that doesn't represent overinvestment in the entire stockmarket over all industries - they wouldn't jump on a given stock or group of stocks more than any other. They would buy random stocks from the market, probably distributed as widely as possible.

No, belief in an efficient market can only be used as a scapegoat here, not as a credible cause.

Comment author: David_Gerard 30 March 2012 11:01:38AM 0 points [-]

That's pretty much the thesis of Markets are Anti-Inductive by EY.

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