I'm having an interesting discussion with my professor on EMH and I'm trying to show him the failure of EMH to explain bubbles. He's taking the position that the price of the assets at the height of the bubble took into account all known information. When new information was known the market adjusted. I've mentioned low interest rates, but have stopped short of fully explaining ABCT.
Anyway, my question to you guys is...in a pure laissez faire economy with no fed distortions, no regulations etc, would you buy into the efficient market hypothesis? That is would you beat the market half the time and fail to beat it the other half? If you consistently earn a higher return than the market, would just call that luck?
At least he wasn't a Keynesian!
The EMH is merely the application of Rational Expectations to financial markets.
If rational expectations is disproven, would that imply that EMH (weak or strong) is disproven as well?
Rational expectations suggests the standard economic assumption that people behave in ways that maximize their utility (their enjoyment of life) or profits. From the Austrian perspective, rational just means purposeful, not necessarily financial maximization. Furthermore, value is subjective. This would runs counter to rational expectations.
Jonathan Mariano: Rational expectations suggests the standard economic assumption that people behave in ways that maximize their utility (their enjoyment of life) or profits. From the Austrian perspective, rational just means purposeful, not necessarily financial maximization. Furthermore, value is subjective. This would runs counter to rational expectations.
There's one more thing. It's not "people behave in ways that maximize their utility", but rather "people behave in ways that they think will maximize their utility".
Big difference. Cause there are a lot of mistaken people out there.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Chris Pacia:I'm having an interesting discussion with my professor on EMH and I'm trying to show him the failure of EMH to explain bubbles. He's taking the position that the price of the assets at the height of the bubble took into account all known information. When new information was known the market adjusted. I've mentioned low interest rates, but have stopped short of fully explaining ABCT.
I definitely believe in the weak version of the efficient-market hypothesis. Failure to explain "bubbles" is not necessarily a weakness of the hypothesis if the term "bubble" itself is incoherent. Quoting Eugene Fama, "I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning."
I must admit I still find it hard to intellectually grasp what it means to know that a security, for instance, has radically departed from a fundamental value and will eventually return to that value; such knowledge would (if we are to believe basic economic theory) provide a strong incentive for arbitrage.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
The trouble I have with EMH is that any time I buy something and resell it for more than I purchased it, I have "beaten the market." If it were not possible to beat the market, then profitable business (or profitable-anything-else for that matter) would not be possible. Entrepreneurs are actually identifying profit opportunities (disequilibria, if you like) and exploiting them to make money, thereby, "beating the market."
Or, perhaps I'm just confused.
Clayton -
So, it would be impossible for a fractional-reserve bank to profitably engage in credit-inflation while simultaneously shorting the market into which it is lending? I don't see anything logically impossible about this, or even difficult to comprehend.