Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The paradoxical efficient market hypothesis (2024)

3quarksdaily.com

Post reply on HN
Print view View original

11–20 of 94 posts

Re: The paradoxical efficient market hypothesis (2024)

#11

Post by AnthonyMouse »

derf_ wrote: post #7

Anyone who has lived through a market correction (the tariff announcements in early April this year being a recent example, though there have been far worse) should be able to see that market prices do not always accurately reflect even the consensus view of value (which itself can be wrong). As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possib…

> As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possible that everything suddenly lost the same amount of value simultaneously.

The price of something and the value of something were never expected to be the same. What's the value of food? If you have none you die, so the value is quite high, but the price is much lower than that because there are many competing suppliers.

And the price of a large class like investment securities can easily change all at once if there is a large shift in supply or demand.

Re: The paradoxical efficient market hypothesis (2024)

#12

Post by truekonrads »

mg wrote: post #10

the hypothesis maintains that stock prices reflect all relevant information about the stock This is a common description of the EMH. But every time I read it, I think: Does information really directly impact the price of a stock? How? What if it takes 12 months of hard thinking to draw the right conclusion from the information? Are there many investors who go to such lengths? Are they all thinking at the same speed?…

In systems thinking there’s the concept of “stocks” or “buffers”. Meaning that change of inputs into the systems first affect stocks/buffers before the outputs.

Re: The paradoxical efficient market hypothesis (2024)

#13

Post by rich_sasha »

I think what is unquestionable is that statistically, given available information, it is hard to make money against other market participants.

It is a form of informational efficiency, but it does not necessarily follow that prices are even statistically correct. The market can be irrational for longer than you can remain solvent.

Re: The paradoxical efficient market hypothesis (2024)

#14

Post by AnthonyMouse »

mg wrote: post #10

the hypothesis maintains that stock prices reflect all relevant information about the stock This is a common description of the EMH. But every time I read it, I think: Does information really directly impact the price of a stock? How? What if it takes 12 months of hard thinking to draw the right conclusion from the information? Are there many investors who go to such lengths? Are they all thinking at the same speed?…

> What if it takes 12 months of hard thinking to draw the right conclusion from the information? Are there many investors who go to such lengths?

It's not required to be all of them. Suppose that it indeed isn't, but the ones who do that work for investment funds who control significant pools of money.

Now the investors in two or three of those places do the research and conclude that some company is about to start doing well and their share price is currently $50 but is about to be $150. So they start buying it, and keep buying it until it gets up near $150. Which happens pretty quickly because they control enough money to use up all of the short-term liquidity at the lower prices and the majority of the shares are held by people who aren't even paying attention and therefore don't try to sell when the price starts going up. Once the price gets to that point they don't buy any more because it's no longer selling at a discount.

Then the company actually starts doing well to the point that everyone can see it but the price hardly moves because it was already priced in.

Re: The paradoxical efficient market hypothesis (2024)

#15

Post by chii »

mg wrote: post #10

the hypothesis maintains that stock prices reflect all relevant information about the stock This is a common description of the EMH. But every time I read it, I think: Does information really directly impact the price of a stock? How? What if it takes 12 months of hard thinking to draw the right conclusion from the information? Are there many investors who go to such lengths? Are they all thinking at the same speed?…

you're wrong about the mechanism - it's not that the thinking is the cause of the efficiency. It's the large number of participants all doing their own brand of thinking, and that the _average_ of all of those approaches the "correct" price. It requires the large number of participants because for such an average to approach "correct", errors within each participant's guesses cancel each other out.

And the immediacy comes from the large amount and speed of the transactions. It does not require that these participants sus out the correct value from information - they could've actually just guessed.

Re: The paradoxical efficient market hypothesis (2024)

#16

Post by saghm »

I forget where I first heard it, but there's a joke about two economists walking down the street. One of them notices a $20 bill on the ground and points it out out, saying "Look, it's $20 just lying there on the sidewalk!" The other shakes his head and says "No, that can't be true; if it were, someone else would have picked it up already"

Re: The paradoxical efficient market hypothesis (2024)

#17

Post by chii »

tru3_power wrote: post #5
smitty1e wrote: post #2

For this paradox to function, information would have to be static, unless I'm missing something.

Also wouldn’t all information have to be available to all participants? How does insider knowledge factor here (because it sure does in the market)

those insiders could be choosing an action that affects the markets, or thru inaction, affect the markets.

The current insider trading rules only prohibit actions, and does not prevent inaction.

As an example, you could imagine that an insider were going to sell their portfolio of company issued shares, but because of insider info they have about a current project that would give rise to a price hike, they may choose to sell _later_ (or not to sell at all). This means the liquidity of the market is now less, and thus, raises the price vs the counterfactual world where said insider _did_ sell. All without revealing any information about the actual insider project.

Re: The paradoxical efficient market hypothesis (2024)

#20

Post by nopassrecover »

AnthonyMouse wrote: post #11
derf_ wrote: post #7

Anyone who has lived through a market correction (the tariff announcements in early April this year being a recent example, though there have been far worse) should be able to see that market prices do not always accurately reflect even the consensus view of value (which itself can be wrong). As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possib…

> As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possible that everything suddenly lost the same amount of value simultaneously. The price of something and the value of something were never expected to be the same. What's the value of food? If you have none you die, so the value is quite high, but the price is much lower than that because there…

> The price of something and the value of something were never expected to be the same

While I agree with you (quite firmly: it’s a great starting point to put on the table to challenge orthodoxy in this space), and think you’re agreeing with the parent comment, it is a fundamental tenet of mainstream economics and the political arguments of neoliberal (aka current mainstream) policy that [price == (market averaged) value], or at the very least [price ~= value].

Another interesting line of argument is to explore things that are valuable that don’t typically get a price: for example household labour, or love and friendship (at least directly: I’m sure a Friedman acolyte would reduce all relationships to exchange and reframe gifts and acts of love as investments).

As an aside for the parent comment: thanks for sharing this, it’s one of the top category of comments/quotes I’ve seen on HN in being useful, insightful, and challenging of conventional understanding in a way that improves understanding and future prediction.

Post reply on HN