The efficient market hypothesis — pseudoscientific mumbo-jumbo​

30 Mar, 2018 at 11:51 | Posted in Economics | 3 Comments

The efficient market hypothesis — EMH — argues there is no free lunch and prices are ‘right.’ Well, as we all know, that is not true. dogNoise does influence asset prices and the law of one price is blatantly violated again and again.

Of course, THERE ARE IDIOTS, as Larry Summers once (in)famously put it. When visiting Chicago, look around …

The price is often wrong, and sometimes very wrong … If policy-makers simply take it as a matter of faith that prices are always right, they will never see any need to take preventive action. But once we grant that bubbles are possible, and the private sector appears to be feeding the frenzy, it can make sense for policy-makers to lean against the wind in some way.

Central banks around the world have had to take extraordinary measures to help economies recover from the financial crisis. The same people​ who complain most about these extraordinary measures​ are also those who would object to relatively minor steps to reduce the likelihood of another catastrophe. That is simply irrational.

Richard Thaler

3 Comments

  1. Economics as a scholarly discipline is impoverished when opposing points of view cannot and will not find ways and means of engaging with one another in ways that test and build common knowledge. The EMH started out its scholarly life as an important and sophisticated technical point about methods: the problem was how to formulate a null hypothesis for studies of historical transaction prices for frequently traded financial securities. Somehow the argument got transformed into a stupid ideological assertion.
    .
    Financial markets, as actual institutions, are somewhat informationally efficient in forming prices of financial securities. In a political economy that uses financial markets to allocate resources and regulate activity, there is presumably a strong social, public interest in those institutions functioning as social mechanisms for information processing at a high level of efficiency, where efficiency has social meaning and value. The operative question for economists ought to be what principles of design and management contribute to making these mechanisms work well: not whether markets “are” efficient as a qualitative and ideological dictum, but how efficient quantitatively and measurably is a particular institution, design or management.

  2. If prices are not efficiently discovered by markets, we should treat inflation as arbitrary for purposes of public policy. Then we can print money for good ideas such as basic income, and nullify potential inflation’s unwanted effects by linking all incomes to price rises. In the extreme case of hyperinflation, you can have an app that converts nominal prices to percent of your purchasing power immediately. Your real income purchasing power will not decrease due to inflation alone, if indexation is implemented by the central bank.

    The private sector already knows that the money supply grows much faster than the consumer price index; see http://subbot.org/misc/econ/m2_vs_cpi_index.png

  3. En glad påsk på dig Unge Man! Förhoppningvis ute hos Fabian. Jo nu börjar,rackarns, ta mig fanken våren röra sig mot Götet!,Så sakteliga !Hoppas det är literligen så ute i era södra bygder osså!! Beste, Jan


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