As part of my response to the pandemic, I’m looking at the way the undead ideas I attempted to kill off in my Zombie Economics have failed yet again. I;m doing it as a series in Independent Australia. The second instalment, Pandemic highlights problems with efficient-market hypothesis has just run.
3 thoughts on “More zombies: the efficient market hypothesis”
Time for a democratic socialist revolution!
Showing my age of course.
“In reality, financial markets woke up to the severity of the crisis around the same time as the general public (the ASX reached an all-time peak on 20 February). Those with inside access to assessment by government analysts, pointing to the likely severity of the crisis, sold early and cashed in huge profits, as in the case of U.S. Senator Richard Burr.” – J.Q.
Burr only started his selloff on Feb 13th. Young market traders, like my son, knew the writing was on the wall by January 30th or thereabouts. No insider knowledge was necessary whatsoever. YouTube and the blogs frequented by independent micro-traders and day-traders were awash with footage and analysis of Wuhan and what it meant. My son was predicting a market crash and long term economic trouble, even a great depression, by Jan 30th or thereabouts, IIRC. So obviously the US security analysis was not particularly timely nor was Burr’s sell-off.
(Anyone who thinks selling shares before a “signalled” crash is all you do, clearly does not know how to play the markets. Those in the know began to short the market and to pick up extra money from the volatility by day trading.)
What the above means in terms of the “efficient market hypothesis” is interesting. Clearly asset prices do not reflect all available information. There was information available early and micro-investors influenced by Nassim Taleb and the like were on to it like a shot. Equally clearly, orthodox financial advisors and big funds are not smart enough to factor in new information of a potential black swan or fat tail risk event. Frankly, they are too stupid and too slow. They don’t have the concepts and do not do the fine targeting necessary in the market which assiduous and knowledgeable micro-traders do. In addition the big institutional investors are too big. If they shift big assets they can create the very crash they dread. It’s a real thing. And they are not set up to micro-manage innumerable slivers of portfolio against adept mirco-traders. Too big to be able to be smart! LOL.
Hence, the claim that it is impossible to “beat the market” consistently is incorrect. Knowledgeable micro traders and some innovative big ones like Koch Industries can beat the market consistently in both bull and bear markets and they do thrive on volatility. However, the claim that big traders constituting the bulk of the market cannot beat the market is kind of true. Indeed is must be a truism. They can’t beat the market consistently by doing en masse pretty much what everyone else does. At the same time, they can sure as hell all lose their shirts at the same time. The big traders and the majority of the market can seriously mis-value the market as the current and previous crises show.
Of course, a market full of bloated institutional investors of little knowledge, less vision and clumsily bureaucratic and systematized processes approaches is an oligopoly (correct term in this context?) of institutionalized idiots operating according to standard neoliberal dogma. They know 2/5ths of 3/4ers of S.F.A.
The idea that ““prediction markets” would provide advance warning of pandemics” has to be funnier than the scene in Fawlty Towers with the blow-up doll. How does one predict emergent and evolutionary phenomena? I’d say they were smoking too much weed but it’s more likely a matter of snorting too much cocaine.
Ikon, I think you, and Ernestine, JQ and many here will appreciate this post by David Walsh of Mona. And you son may make use if his share market and betting analogies. And yiur wife will appreciate this too. But, be careful, taking his wife’s advise will severly curtail your blogging!
“Killers, cardinals, quarantines, jellybeans and vaccines
“Because, most likely, they will interpret data differently than you do.
Without evidence, don’t align yourself with the opinion that your foes are likely to disagree with. I see lefties thrashing about trying to find reasons to castigate Morrison concerning his handling of COVID-19. It’s the cruise ships, or what he’ll do when it’s all over, or the safety net isn’t wide enough (or too wide). When criticising decisions made by natural enemies, there is a strong tendency to evaluate those decisions with data compiled after the decision was made.
It’s a bad decision if it expands (or ignores) tail risk. This is a big one. The most consequential strategic mistakes fall through the chasms that tail risk opens. But it needs some explanation.
It’s a bad decision if it increases degrees of freedom without compensatory systemic functionality. If you are doing something okay, perhaps modelling horseracing in New Zealand and winning, or building houses out of bricks, then you don’t make changes to improve the system, unless the improvements are simple, incremental, and substantial. Break losing systems by all means (only slightly), but preserve things that are going right. A revolution replaces an apparently dysfunctional system—but with what? A new system, that’s had no sensitivity testing, and didn’t derive from incremental understanding. It’ll be worse. There are more configurations of a system that break it than make it better. To make a change, find an improvement that’s worthy, and stress test the system under the new regime. Programmers (at least good ones) know that it’s risky to fix a bug that doesn’t matter. Fixing bugs often creates new bugs. But even that is better than starting from scratch.
I wrote down a bunch of other rules. But if I keep writing I’ll disincentivise you from reading anything I write that you have to pay for. More importantly, I’ll incentivise my wife to find another life. If you want to know more, you shouldn’t be reading a blog, anyway. You should be reading Nassim Taleb.”