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Markets are Efficient if and Only if P = NP

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Re: Markets are Efficient if and Only if P = NP

#61

Post by doyoulikeworms »

jbooth wrote: post #55
gsmaverick wrote: post #48

Earlier quoted context omitted.

The United States does have a central bank; it's the Federal Reserve. They kept interest rates abnormally low for much of the last decade which meant that borrowing was incredibly cheap causing many consumers to overextend themselves. Regulation, government intervention they're the same thing. It is undeniable the government intervened in the housing market and this was discussed earlier in this thread[1]. [1] http:/…

"Regulation, government intervention they're the same thing." Again. This subthread is not about turning your brain off. The fed changing interest rates is not regulation. It's not writing laws, it's not forcing anyone to do anything.

>Again. This subthread is not about turning your brain off.

I'd appreciate it if you quieted your condescension. For someone who didn't even know that the United States had a central bank, you are extremely vocal about the topic of finance. We're all here to learn and exchange.

Even if actions of The Fed are not necessarily regulations themselves, the fact that The Fed exists at all and is able to exert influence is certainly the result of law. Understanding this, I don't have a problem with conflating the actions of The Fed and the regulation that enables The Fed-- "regulation".

There is healthy debate regarding the cause of the 2008 crash. Economics is not a science proper, and the data is noisy. You cannot simply write-off the argument wholesale by latching on to the debatable causal link between "de-regulation" and the crash. Unless, of course, you turn off your brain.

Re: Markets are Efficient if and Only if P = NP

#62

Post by NY_Entrepreneur »

He's mostly smoking funny stuff: He's talking applications of optimization. Okay. Optimization contributes problems, e.g., integer linear programming, in set NP-complete only if one insists on exact optimality down to the last tiny fraction of a penny of cost in the worst problems that can occur, even in principle, in execution time that grows no faster than a polynomial in the size of the problem. That's a LOT of very special and quite unrealistic context.

E.g., it's not the least bit clear that finance needs to attack the worst case problems. Even if so, finance, anywhere close to reality, doesn't need to get solutions that save all of the last tiny fraction of a penny.

If relax worst case problems and saving the last tiny fraction of a penny, then the situation is MUCH different. E.g., once I got a feasible solution to an ILP with 40,000 constraints and 600,000 variables within 0.025% of optimality on a 90 MHz Intel processor in 905 seconds. More generally, here's an easy approach to the ILP problems: Just drop the integer constraints, solve with LP, and then round to integer values. For the LP solution, if insist, then use a polynomial LP solver. Crude? Sometimes. Always crude? No.

He's making a common mistake: He's assuming that because in general ILP is in NP-complete that good work on all practical ILP problems has to be too challenging, and that's nonsense.

Re: Markets are Efficient if and Only if P = NP

#63

Post by artsrc »

wpietri wrote: post #21
mseebach wrote: post #14

Earlier quoted context omitted.

I'm pretty sure financial academics don't claim that markets are efficient, but that they tend towards efficiency.

For those wanting to know more about the efficient-markets hypothesis, Wikipedia has a good article: http://en.wikipedia.org/wiki/Efficient_markets My amateur understanding is that most academics get that it's a simplifying assumption, but that a lot of other people treat it as a guarantee. It's sort of like people who learn a little about evolution and then conclude that a) we are the most highly evolved organism on…

> a) we are the most highly evolved organism on the planet

I know little about evolution and assume that bacteria are the most evolved because they have a faster cycle of reproduction, and stronger selective pressure.

> My amateur understanding is that most academics get that it's a simplifying assumption, but that a lot of other people treat it as a guarantee.

Most practitioners do understand that it is a simplifying assumption, and then ignore that fact, just as most engineers ignore quantum and relativity effects when calculating the required size of beams. The difference between the better and the simpler models is big enough to cause problems in economics.

Re: Markets are Efficient if and Only if P = NP

#64

Post by nopassrecover »

tokenadult wrote: post #9

Hacker News submission and discussion from 540 days ago of previous version of same author's paper: http://news.ycombinator.com/item?id=1144548

I also posted the author's video explanation here the other day: http://news.ycombinator.com/item?id=2867429

Re: Markets are Efficient if and Only if P = NP

#65

Post by artsrc »

bradshaw1965 wrote: post #18

People get tied up in knots about the Efficient Market Hypothesis. The factor that often gets ignored when approaching the problem is the costs factor. Trading fees, Analysis, Commissions, etc. make it very hard in practicality to beat passive investment with the markets only being passably efficient.

I think that analysis ignores tax effects. To have a stable excess return you need some collection of people accept a stable lower return. This is possible if you have different tax regimes. Tax advantaged entities can accept coupons/dividends, and highly taxed entities want capital gains.

Re: Markets are Efficient if and Only if P = NP

#66

Post by artsrc »

gsmaverick wrote: post #48
jbooth wrote: post #38

Earlier quoted context omitted.

The, uh, the united states doesn't have a central bank. I don't want to be nitpicky here, but this is a conversation about not turning your brain off. Are you referring to the federal reserve? They don't regulate anything. The SEC? They're in no way similar to a central bank and have been regulating progressively less over the last 70 years. What changed in 2008 that made their regulation more burdensome? If you're m…

The United States does have a central bank; it's the Federal Reserve. They kept interest rates abnormally low for much of the last decade which meant that borrowing was incredibly cheap causing many consumers to overextend themselves. Regulation, government intervention they're the same thing. It is undeniable the government intervened in the housing market and this was discussed earlier in this thread[1]. [1] http:/…

> They kept interest rates abnormally low for much of the last decade which meant that borrowing was incredibly cheap causing many consumers to overextend themselves

The federal reserve manages the cash rate. The don't directly specify the risk premium spread associated with risky loans.

If someone offers a no-recourse billion dollar loan with no obligation for collateral, the rational financial decision is to take the loan, and invest the money. If the investment appreciates pocket the money. If it goes south return the investment and say "your problem" to the lender.

The federal reserve said they thought self interest would ensure the banks would not invest stupidly.

I don't see how this argument changes if overnight rate is 10% or 1%.

Re: Markets are Efficient if and Only if P = NP

#67

Post by Rickasaurus »

peteretep wrote: post #5
ColinWright wrote: post #2

It feels to me that all he's done is show that the "instantly" in the usual definition of markets being "efficient" is a nonsense. Prices must take time to compute, you can't know the correct price instantly even with access to all the past information. He proves that, but it doesn't seem that surprising to me.

I was coming here to write almost exactly this. Markets are provably not 'instantly' efficient because arbitrage exists. Arbitrage is simply not possible in an efficient market, because it's an exploit of inefficiency. However, exploitation of abitrage (and of knowledge generally) is what makes markets largely efficient.

The point though is that whoever has the most computational power has the most power to exploit arbitrage.

Re: Markets are Efficient if and Only if P = NP

#68

Post by gfodor »

mquander wrote: post #7
gfodor wrote: post #3

Earlier quoted context omitted.

If it's true it uproots a lot of conventional wisdom about trading and the ability to time the market.

No, it doesn't. Relevant conclusions about markets in a theoretical sense all depend on (from the link) "current prices...[reflecting]...information available in past prices," which isn't even approximately true in the real world; current prices are driven by irrational actors with incomplete information.

What you're saying here is not 'conventional wisdom.' Conventional wisdom (at least, fundamental analysis) is that the price on the market incorporates all information and that the market is by and large full of rational actors. So, timing the market is a fool's errand, since you can't get ahead of the present.

I'm not saying I agree with this, I'm just saying that that's what you're taught in school. If there were a way to prove this indisputably incorrect then it would probably be an interesting result.

Re: Markets are Efficient if and Only if P = NP

#69

Post by artsrc »

aphyr wrote: post #60

If we allow that large, computationally capable entities are likely to form in free markets, it is probable that individuals will be faced with a market in which the prices of major goods vary wildly from minute to minute, from person to person, and are predicated on both fantastically complicated loyalty programs and data collected about the individual and current market circumstances, processed in statistical model…

Even fairly simple tools must be able to game humans. We must be so bad at making rational decisions that prices typically are set just below a psychologically significant level for example $2.99. This of course assumes the market is correct in its assessment of us.

Re: Markets are Efficient if and Only if P = NP

#70

Post by yummyfajitas »

jbooth wrote: post #26
yummyfajitas wrote: post #19

Earlier quoted context omitted.

Was the fall of 2008 "extremely close" to optimal? Home prices crashed and then more or less stabilized. So yeah, I'd say the crash was close to an optimal price correction. http://research.stlouisfed.org/fred2/series/SPCS20RSA?rid=19... I'm a little confused how why you would believe people who follow Hayek are unfamiliar with questions of information asymmetry and borked incentives. After all, don't they form the b…

I'm confused because everyone who follows Hayek seems to have the solution in hand before they've even heard the problem statement, and that solution doesn't acknowledge those concerns. I've never heard a self-proclaimed Hayek follower (note that word, follower not thinker) say "I'm worried that the private sector doesn't arrive at the correct incentives in this case" about anything, ever. That's why I'm confused.

You should try reading Hayek, rather than listening only to straw men who claim to have read his books. He was well aware of information problems, externalities, etc. You might dislike the fact that he believes politicians are also subject to these problems, but he is hardly unaware of them.

If you want to see Hayek followers concerned about such issues, go read the blogs of assorted gmu economists (Tyler Cowen, Robin Hanson, Bryan Caplan, etc).

http://www.overcomingbias.com/2009/11/require-baby-paternity...

http://havemorekidsbook.com/

Or see anyone who pushes the signalling model of education.

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