I simultaneously love and hate UChicago! What should I do?

JHS
Wed, 09 Jul 2014 14:27:35 +0000

By the way, the Efficient Market Hypothesis is not in fact a claim that all markets are actually efficient and that transaction costs are zero. If I remember correctly (it has been over 30 years since I studied this), a great deal of Gene Fama’s work had to do with the effect information costs had on markets. I am not even remotely a right winger, and I found it consistently interesting and challenging – nothing that was easy to write off with a few big philosophical criticisms. (And their professional critics don’t do that, either. That’s the stuff of newspaper op eds, not actual economics.)

As for your examples of people beating the markets: First, the fact that a few people have runs of good luck does not invalidate the entire concept of probability. People win lotteries, too, but that does not make lotteries a good investment. With millions of people “playing” every day, it’s not surprising that you can find a handful of people who have won consistently far more than they should. They get lionized as geniuses, and perhaps some of their success starts being self-referential, as others try to follow them into investments. But it may just be a standard Poisson distribution, in which there are always a handful of outliers with improbable results. We never hear about the corresponding outliers who lose consistently – and they tend to drop out of the “game” anyway. (It’s the same thing with “cancer clusters”: We hear all the time about areas with improbable rates of cancer, and everyone just knows what the culprit is. But we never hear about the places --likely equal in number,-- with improbably low rates of the same cancer.)

Second, in most cases, those people are not beating the nearly efficient market. They are looking for ways to exploit obviously inefficient markets where public information and trade opportunities are severely limited.