[dead]
The paradoxical efficient market hypothesis (2024)
71–80 of 94 posts
Re: The paradoxical efficient market hypothesis (2024)
#72Any hypothesis based on false assumptions is a priori false, and the EMH is filled with false assumptions.
Re: The paradoxical efficient market hypothesis (2024)
#73Earlier quoted context omitted.
Information that requires 12 months to figure out isn't information that's available now. Say you want to know the 400 trillionth digit of pi. We have all the information needed right now to know how to compute it. But you don't know what the actual digit is yet. The information isn't available and won't be until you set your supercomputer on it for some number of months. Having the information necessary to derive ot…
That definition would mean that smarter investors, who can think faster and further ahead, get information faster. And therefore have information now that others do not. That seems to be directly the opposite of the common definition of the EMH, which emphasizes how the market reacts to new information. And not how it produces information. For example in TFA: "the market rapidly responds to new information" Wikipedia…
>That definition would mean that smarter investors, who can think faster and further ahead, get information faster. And therefore have information now that others do not.
And that is trivially true
Re: The paradoxical efficient market hypothesis (2024)
#74The 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…
If the market is efficient then there is no risk adjusted alpha, which renders the search for it a waste of time and effort, which means no actor would rationally continue it, which means there is no mechanism for price discovery, which would render the market totally inefficient.
This is the paradox.
EMH is unfalsifiable at best and tautological at worst.
Re: The paradoxical efficient market hypothesis (2024)
#75Earlier quoted context omitted.
Not disagreeing with you, but isn't that already obvious from the fact that economic activity happens in the first place? If you buy 5 apples from me for $5 then two things must be true: 1. The value that those 5 apples have to you exceeds the value that $5 have to you, at least at this very moment. Otherwise you would hang on to your $5 instead. 2. The value that those 5 apples have to me is less than $5 have to me,…
Not necessarily. You could have a transaction take place where the buyer and the seller both value what's being exchanged in exactly the same amount and then go through with the transaction anyway because they both find trades entertaining or have a cultural preference for doing business with each other or just both place zero value on transaction costs. That isn't common but that doesn't mean it could never happen.
> they both find trades entertaining or have a cultural preference for doing business with each other
That is value. It is any benefit they capture which they would not otherwise.
Re: The paradoxical efficient market hypothesis (2024)
#76I have just written an post on technical analysis that presents a balanced perspective on the Efficient Market Hypothesis, the Random Walk Hypothesis, and their relationship to practical applications. I explore how retail traders identify patterns, how these patterns may be exploited in high-frequency trading, and how machine learning contributes to detecting and leveraging such patterns. In case someone is interested: https://beuke.org/technical-analysis/
Re: The paradoxical efficient market hypothesis (2024)
#77It makes no sense because people do not acquire information at the exact same time, nor do they act on it with the same amount of force, i.e., capital.
It’s the same stupid people who say the market is a random walk. Oh yeah, if it was a random walk, then why do earnings reports even matter? Companies could just lose and gain whatever they want, and stocks would just fluctuate randomly.
Here’s the truth. It’s called Rice’s theory of opportunity. It says that there is a golden window on the order of a few weeks to a few months where the signal-to-noise ratio has the least attenuation. This is because it avoids the initial transitory periods, the real-time gap between the knowledge existing and the knowledge spreading to people with enough resources to make a difference.
Re: The paradoxical efficient market hypothesis (2024)
#78I think the valuations of dogecoin and fartcoin don't fit well with the efficient market hypothesis. They both have no assets and no profits but fartcoin is valued at $668 million and dogecoin at $39 billion. Surely in a rational market fartcoin should be valued at more as it has a funnier name?
Slightly more seriously his assertion:
>Alternatively stated, the Efficient Market Hypothesis is true if [...] a sufficiently large majority of investors believes it to be false.
is flawed. They could believe it false but still make a mess of the valuations. Which can cause real world problems if profesional investors put your pension money into webvan or other bubble stocks and then there is a cash shortage after the dot com bubble burst. Of course they are wiser now and won't make such errors with AI.
Re: The paradoxical efficient market hypothesis (2024)
#79> if a sufficiently large majority of investors believe the hypothesis, they naturally would assume that new information about a stock would very quickly be reflected in its price. They would conclude that since relevant news almost immediately moves the price up or down, and since new developments can’t be predicted, neither can price increases or decreases This is an oversimplification of how professional investing…
But maximizing long term returns means consistently maximizing short term returns. In fact, the larger the capital the larger risk you can take since you can survive longer streaks of bad luck as long as your bets have positive expected value.
Re: The paradoxical efficient market hypothesis (2024)
#80Anyone 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…
Paper: A Framework for Understanding Market Crises (1999)
https://www.risknet.de/uploads/tx_bxelibrary/Bookstaber-Unde...