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The paradoxical efficient market hypothesis (2024)

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Re: The paradoxical efficient market hypothesis (2024)

#21

Post by Nevermark »

Information characterizing a company’s value isn’t the same thing as information indicating a company’s value. There can be a lot of analysis and model building in between. And different models can behave very differently, even if their prediction strength is similar.

Information publicly available doesn’t mean anyone can process it all. Every actor is operating off a different subset of information.

Lots of intentionally low information investors (inhabitants of indexed funds) demand stock or supply stock, pushing prices in directions unrelated to value changes, due to index list changes and rebalancing events.

Investors, of all magnitudes of wealth, have unending personal or private idiosyncratic reasons for the timing of many investments or sales, besides individual asset return optimization.

The value of a stock rises and falls as its absolute expected return rises and falls relative to the changing returns of the rest of the entire market of investment vehicles. Everything impacts everything.

All these shifts happen over varying time frames.

Almost all relevant market facts are time varying, often with turbulence and ambiguity.

The fast moving investors most influential in setting prices, must model the whole market’s 2nd order and even 3rd order reactions (by similar actors) due to feedback effects and dynamics.

Sudden market wide changes trigger waves of low analysis buying and selling. Compounded by the higher order risk this creates to leverage, annuity responsibikities, hedging, and many other amplifiers of behavior.

The efficient market hypothesis is an interesting and enlightening thought experiment. A reduced dimension toy/sim market.

Not a credible model.

Not even if every single participant was frantically and relentlessly re-valuing and re-balancing at the margins to a firehose of comprehensive market information.

Re: The paradoxical efficient market hypothesis (2024)

#22

Post by verbify »

saghm wrote: post #16

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"

This joke was in the article?

Re: The paradoxical efficient market hypothesis (2024)

#23

Post by janalsncm »

Does the EMH state that prices will reflect on the price of a stock instantly? If not, I don’t think there’s a paradox. EMH would just mean it will eventually converge? I guess that makes it pretty toothless in practice then.

I feel like the stock market is pretty divorced from fundamentals at this point i.e. speculation makes it more like a Keynesian beauty contest (picking stocks you think other people will think are valuable).

https://en.m.wikipedia.org/wiki/Keynesian_beauty_contest

Re: The paradoxical efficient market hypothesis (2024)

#24

Post by tennysont »

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…

Put another way: price is determined by need and supply (aka, demand curve meets supply curve).

I would pay anything for air if I needed it, but I will gladly sell air in my yard for $1/m^3 because that air is worthless to me.

Is air priceless or worthless?

That is why price != value as most people think of it.

Re: The paradoxical efficient market hypothesis (2024)

#25

Post by whatever1 »

Sir this is just a casino. Stocks have nothing to do with the businesses right after they are issued. A business can opt to just never issue dividends (Hi Amazon). So the stock itself has 0 actual value. It does not generate cash. (Ok if the company goes belly up you will get a percentage of the carcass)

But we can all gamble on what it is worth!

So stockholders are like roulette pill holders. Everyone just bets on where the pill will fall. Few are luckier than others. Some smarter know whether the roullete is rigged and have better chances.

Re: The paradoxical efficient market hypothesis (2024)

#26

Post by scubbo »

verbify wrote: post #22
saghm wrote: post #16

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"

This joke was in the article?

Reading the article would have been inefficient.

Re: The paradoxical efficient market hypothesis (2024)

#28

Post by addcommitpush »

nopassrecover wrote: post #20
AnthonyMouse wrote: post #11

Earlier quoted context omitted.

> 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)…

Note that in orthodox microeconomic theory, price is equal to the marginal value of the last exchanged unit. To use the above example of food:

> What's the value of food? If you have none you die, so the value is quit of high, but the price is much lower than that because there are many competing suppliers.

The first calories of the day, the ones that prevent you from dying, have a very high subjective value - but you pay them at the value of the 3000th calorie of the day, the extra drop of ketchup on your fries, which has a very little value.

And thus of course average value x volume is very different from (marginal value of last unit) x volume.

Re: The paradoxical efficient market hypothesis (2024)

#29

Post by mg »

AnthonyMouse wrote: post #14
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 d…

But do we see that happen?

That would mean that the p/e-ratio of a company would rise sharply long before the profits set in. And that rise would be called "mysterious" by the general public. And then only when the profits set in, the p/e would come down.

I can't see that in Nvidia for example:

https://www.macrotrends.net/stocks/charts/NVDA/nvidia/pe-rat...

The price roughly rose along the earnings. Even though the foundations for generative AI became clear in 2015.

Re: The paradoxical efficient market hypothesis (2024)

#30

Post by marcus_holmes »

janalsncm wrote: post #23

Does the EMH state that prices will reflect on the price of a stock instantly? If not, I don’t think there’s a paradox. EMH would just mean it will eventually converge? I guess that makes it pretty toothless in practice then. I feel like the stock market is pretty divorced from fundamentals at this point i.e. speculation makes it more like a Keynesian beauty contest (picking stocks you think other people will think a…

This is the truth. What drives the price up or down is speculation about whether the price will go up or down. There is only a very loose connection with actual company performance.
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