[ExI] Psychology of markets explanations
stathisp at gmail.com
Sat Jun 6 13:23:26 UTC 2009
2009/6/6 BillK <pharos at gmail.com>:
> You know what the efficient market hypothesis is, don’t you? It’s a
> theory that grew out of the University of Chicago’s finance
> department, and long held sway in academic circles, that the stock
> market can’t be beaten on any consistent basis because all available
> information is already built into stock prices. The stock market, in
> other words, is rational.
> In the last decade, the efficient market hypothesis, which had been
> near dogma since the early 1970s, has taken some serious body blows.
> First came the rise of the behavioral economists, like Richard H.
> Thaler at the University of Chicago and Robert J. Shiller at Yale, who
> convincingly showed that mass psychology, herd behavior and the like
> can have an enormous effect on stock prices — meaning that perhaps the
> market isn’t quite so efficient after all. Then came a bit more
> tangible proof: the dot-com bubble, quickly followed by the housing
> bubble. Quod erat demonstrandum.
The efficient market hypothesis is perhaps a misnomer. It doesn't mean
that the market is rational, just that it isn't possible in general to
beat the market by being cleverer than anyone else. Stock prices
incorporate all available information, including peoples' tendency to
be irrational. If you could predict irrationality better than the
market can, you could easily become rich.
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