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Thread: The So-Called "Efficient" Market

  1. #1
    Join Date
    Jan 2005
    Left Coast

    The So-Called "Efficient" Market

    In other words, the idiotic idea that markets are rational and self-correcting.

    Of course, it came from the economically-and-intellectually-challenged pointy-headed school of thought out of the University of Chicago.

    However, behavioral economists -- Richard H. Thaler, also at the University of Chicago and Robert J. Shiller, Yale -- have convincingly showed that mass psychology, herd behavior , etc., have more of an effect on stock prices, the mass hysteria effect. Perhaps the market isn’t quite so efficient after all.

    Mass hysteria seems more a factor in stock prices than anything else.

    You call that rational?

    According to Jeremy Grantham, a respected market strategist with GMO, an institutional asset management company:
    The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight. ‘Surely, none of this could be happening in a rational, efficient world,’ they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of the dangers of asset bubbles breaking.
    "The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders..." That would be boneheaded Alan Greenspan, a rejected but still besotted would-be lover of Ayn Rand.
    Brother, you can believe in stones as long as you do not hurl them at me. Wafa Sultan

    “War is an American way to teach geography,” British soldier

    War is sweet to those who have not tasted it, but the experienced man trembles exceedingly at heart on its approach. – Pindar

  2. #2
    Join Date
    Feb 2004
    Sydney, Oz
    The efficient markets hypothesis is incorrect, I think even the chicago school knows it's incorrect, but they believe it is suitable for the kind of mathematical modelling that's their methodological approach. The efficient markets hypothesis isn't about markets being "self-correcting", if they're perfectly efficient, they never need "correcting" to begin with, because they're never wrong.

    Ayn Rand's connection with economics is largely with the Austrian school, she was familiar with the work of Ludwig von Mises, although in later years Rothbard was extremely critical of the cult that sprung up around her, and her support of McCarthyism and the Vietnam war. The Austrians ardently oppose the efficient markets hypothesis.

    Alan Greenspan headed a government organisation that is basically based on the premise that markets are not an efficient way of determining the supply of money, that instead a central bank needs to do it.

    I think it's worth quoting Rand,

    "Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.’”

    pretty much sums up what's happening to the US about now.
    Last edited by Symbiote; 06-07-2009 at 08:24 PM.
    He or she who supports a State organized in a military way – whether directly or indirectly – participates in sin. Each man takes part in the sin by contributing to the maintenance of the State by paying taxes.

    ~ Gandhi

  3. #3
    Join Date
    Sep 2006
    The EMH is retarded.

    A model that requires equal opportunity to information and equal timely access to such information fails to gel with reality.

  4. #4
    Join Date
    Nov 2009
    Excellant article! Should be required reading!

    However, behavioral economists -- Richard H. Thaler, also at the University of Chicago and Robert J. Shiller, Yale -- have convincingly showed that mass psychology, herd behavior , etc., have more of an effect on stock prices, the mass hysteria effect.
    Don't forget the testosterone!
    Last edited by dconklin; 11-25-2009 at 12:05 PM.

  5. #5
    Join Date
    Aug 2010

    Reduce trade deficit; increase GDP and median wage.

    Simone, social studies have some similarities to the “hard physical sciences” such as physics and chemistry, but they generally do not lend themselves to experiments where we can reasonably retain the values and attributes of all or almost all significant factors and while modifying and evaluating the factor being studied and the consequences due to the studied factor.

    Economics as all social studies are much less objective than the true sciences and much more dependent upon very erratic creatures, they are dependent upon peoples’ behavior.

    My particular interest is our annual global trade deficits of goods and our policies’ effect upon USA’s economy. My sense is that excluding Libertarians, among the remainder of USA’s political spectrum there’s significant dissatisfaction with our seeking a “pure” global free trade policy.

    Wihin our present politicaly polarized climate, global trade is one of the very few economic issues with any chance of obtaining a consensus to act.

    Comparative advantage refers to determination among choices. Our goal is the choice most advantageous to ourselves. If none of the alternatives are to our net advantage, the comparative advantageous goal is to choose the least disadvantageous; (i.e. “comparative advantage” is a term that simply refers to the considerations of available alternative options).

    Under USA’s policy of “pure” free trade, it’s certainly to individual enterprises and persons comparative advantage to purchase cheaper imported goods. What are to individuals’ advantages are not necessarily to their nations’ advantages.

    Competitive advantages are ones’ advantages over their competitors. Free trade does not grant enterprises any competitive advantages but if they fail to avail themselves of cheaper foreign products (within a purely free trade policy) it certainly puts them at disadvantages to their competitors.

    Aggregate wage and salary earning families’ benefit from cheaper foreign goods but that does not compensate for USA’s annual trade deficits of goods detrimental effect upon USA’s annual GDP and median wage. Due to USA’s annual trade deficits, USA had less jobs and our employees earned less wages than otherwise. (Otherwise being no annual trade deficit).

    I’m among the proponents for a trade policy proposal based upon Import Certificates. It is not “pure” free trade but it is absolutely free competitive enterprise. It grants government no policy discretion. Assessing the value of goods in U.S. dollars within the USA is a technical rather than a policy determination. We can continue to benefit from cheaper foreign goods but not the absolutely cheapest priced goods. We cannot afford the absolute cheapest prices.

    Refer to

    or google “ wikipedia, import certificate “.

    Respectfully, Supposn

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