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The paradoxical efficient market hypothesis (2024)

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Re: The paradoxical efficient market hypothesis (2024)

#61

Post by tempestn »

rhubarbtree wrote: post #51
tempestn wrote: post #49

Earlier quoted context omitted.

All models are flawed; some are useful. I would argue the EMH is an imperfect but useful model of market behaviour.

You make a good point and I’m open to changing my mind. How do you think it’s useful? Can it be used to make predictions about the future, for example?

Aggregate predictions, yes. For example, the long-term, risk-adjusted expected return of all liquid securities should be the same if we believe EMH. Therefore by holding a diversified sample of securities in a market, your expected return should be the same as that of the market as a whole (though actual return won't be). Any expected difference would theoretically be due to a difference in risk.

Now, it may be that the risk is one that other people care about but you don't. Some investors might be more sensitive to short-term volatility than others, for example. But a weak EMH can at least give a framework for thinking about these kinds of decisions. (Like whether to value tilt, for example. Or whether to invest in active or passive funds.)

It also gives you a framework to think about in which cases it is more or less likely to hold. Small, illiquid markets are the least likely to be efficient, in my opinion and experience. My only actively managed investment is in such a market.

Re: The paradoxical efficient market hypothesis (2024)

#62

Post by mullingitover »

tempestn wrote: post #48
whatever1 wrote: post #25

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 w…

A company could decide to never pay a dividend, yes. But that doesn't mean the stock is worthless; you need to take the thought process further. Who ultimately controls a company? The shareholders. So, imagine a scenario where a company is profitable and seemingly valuable, but for some reason the share price is not increasing, so the shareholders are not seeing their wealth increase. In that scenario they would prob…

> Who ultimately controls a company? The shareholders.

Some subset of shareholders. For example: Meta Inc. and their Class A vs B shares, GOOGL vs GOOG, etc.

Re: The paradoxical efficient market hypothesis (2024)

#64

Post by mullingitover »

whatever1 wrote: post #25

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 w…

It's a Keynesian Beauty Contest:

> A Keynesian beauty contest is a metaphorical beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive.

This explains why informed investors know TSLA is worthless, but they also know that the retail market as a whole thinks it's as precious as unicorn tears, so it is priced accordingly.

Re: The paradoxical efficient market hypothesis (2024)

#65

Post by whatever1 »

mullingitover wrote: post #62
tempestn wrote: post #48

Earlier quoted context omitted.

A company could decide to never pay a dividend, yes. But that doesn't mean the stock is worthless; you need to take the thought process further. Who ultimately controls a company? The shareholders. So, imagine a scenario where a company is profitable and seemingly valuable, but for some reason the share price is not increasing, so the shareholders are not seeing their wealth increase. In that scenario they would prob…

> Who ultimately controls a company? The shareholders. Some subset of shareholders. For example: Meta Inc. and their Class A vs B shares, GOOGL vs GOOG, etc.

Also not clear what their voting power is as at any point the company can just issue infinite more shares.

Re: The paradoxical efficient market hypothesis (2024)

#66

Post by rcxdude »

repsilat wrote: post #9
Tazerenix wrote: post #4

The EMH is a description of how the market behaves when a sufficiently large number of independent actors are looking for alpha. It is not a prescription of how the market should behave. The conclusion is that with a sufficiently large number of actors in the market all seeking profits by trying to find misevaluation of stock prices, the excess profits of any individual actor will (assuming they all have access to th…

Yeah, I think the "paradox" is usually a problem for pundits and academics and not practitioners. Lots of people have experience finding and correcting market inefficiencies, usually getting paid for it.

Yeah, I feel like people have this idea that the EMH is 'economists think markets are perfectly efficient' when really it's 'under these idealised conditions a market should approach perfect efficiency' and any real market is obviously not going to be perfectly efficient, but ones that get closer to those conditions should be more efficient.

(And looking at how traders work, it's all about finding a strategy that no-one else has found and executing on it. Once two competitors with similar resources know the strategy, it ceases to be particularly profitable, which to me seems to be pretty in line with the EMH)

Re: The paradoxical efficient market hypothesis (2024)

#67

Post by whatever1 »

mullingitover wrote: post #64
whatever1 wrote: post #25

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 w…

It's a Keynesian Beauty Contest: > A Keynesian beauty contest is a metaphorical beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive. This explains why informed investors know TSLA is worthless, but they also know that the retail market as a whole thinks it's as precious as unicorn tears, so it is priced accor…

So the market actually predicts the gambling strategies of the players.

For example people who kiss their dice will likely put money on red.

Re: The paradoxical efficient market hypothesis (2024)

#68

Post by program_whiz »

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?

HN equivalent: someone sees a link to an article and says "why would I read it, when all relevant information has already been incorporated into the comments?" Its the "efficient comments" hypothesis, all information relevant to a rational HN user about the article is already in the comments.

Re: The paradoxical efficient market hypothesis (2024)

#69

Post by tempestn »

mullingitover wrote: post #62
tempestn wrote: post #48

Earlier quoted context omitted.

A company could decide to never pay a dividend, yes. But that doesn't mean the stock is worthless; you need to take the thought process further. Who ultimately controls a company? The shareholders. So, imagine a scenario where a company is profitable and seemingly valuable, but for some reason the share price is not increasing, so the shareholders are not seeing their wealth increase. In that scenario they would prob…

> Who ultimately controls a company? The shareholders. Some subset of shareholders. For example: Meta Inc. and their Class A vs B shares, GOOGL vs GOOG, etc.

Sure, but whichever shareholders control the company, they ultimately want to profit from that ownership, right? So if the stock price isn't reflecting the true value of the underlying company, they're going to do something about it.

I suppose there are edge cases where they will instead attempt to profit by convincing the board to pay the CEO a trillion dollars, but even that kind of thing probably only flies if the stock price is also going up. (I wouldn't have thought to include that exception at all some years ago, but at least one salient example has proven this possible, if not likely.) So I could see a case for not trusting the valuation of companies that behave in that particular manner. Where the CEO is effectively the controlling shareholder, especially if they have shown a willingness and ability to inflate their own compensation.

Re: The paradoxical efficient market hypothesis (2024)

#70

Post by tempestn »

whatever1 wrote: post #65
mullingitover wrote: post #62

Earlier quoted context omitted.

> Who ultimately controls a company? The shareholders. Some subset of shareholders. For example: Meta Inc. and their Class A vs B shares, GOOGL vs GOOG, etc.

Also not clear what their voting power is as at any point the company can just issue infinite more shares.

The existing controlling shareholders would need to support the issuing of new shares. They would only choose to dilute their own holdings if it were advantageous to do so.
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