[ExI] EMH/was Re: Psychology of markets explanations

[Rafal Smigrodzki]

On Mon, Jun 22, 2009 at 11:35 AM, <dan_ust at yahoo.com> wrote:
>
> --- On Fri, 6/19/09, Rafal Smigrodzki <rafal.smigrodzki at gmail.com> wrote:
>> On Fri, Jun 19, 2009 at 3:09 PM, <dan_ust at yahoo.com> wrote:
>>> The EMH assumes that market prices are in
>>> equilibrium and factor in all relevant data.
>>
>> ### Does it?
>
> Yes.  It's only in equilibrium that no one in the market would be able to beat current prices.  I.e., there are no opportunities for profit in equilibrium: everyone would be in an optimal state and any deviation from this would induce a loss.

### But all relevant data are never even known, much less factored in.
-----------------

>
>> I thought that this is so only the the strong-
>> or to a
>> lesser extent semi-strong form of the hypothesis. The weak
>> form only
>> says that prices follow a random walk and analysis of past
>> prices
>> cannot be used to reliably achieve above-market returns.
>
> But this weakened form is so weak that it doesn't really predict much -- save that _pure_ technical analysis will likely fail in the long run.  But pure technical analysis is not the only tool or even the most used tool at the disposal of entrepreneurs in general or just people in asset markets.

### Yeah, sure, this is why some people make consistently money on the
market in the long run.

----------------

>
>> I tend to
>> believe EMH in its weak form, aside from minor
>> inconsistencies ( such
>> as high performance of low P/E stocks).
>
> How would you explain the current crisis in light of the EMH?

### Part of it was crude government insistence to jettison sound
lending practices, part of it was in the manner of a Ponzi scheme
where some participants knew it would explode but hoped to realize
gains before (some did), part of it was lack of experience with new
financial instruments, part was government interference with bond
ratings, interest rates, part of it was rational expectation of being
bailed out. Add to it the usual agent-principal problem, the existence
of centrally-issued money, the long feedback inherent in real estate
transactions, dearth of short-sellers (due to both widespread
prejudice and government persecution) and voila, you get in trouble.
Weak EMH says only you couldn't predict that from technical analysis
of previous prices, but some smart people saw what was going on, and
did beat the market.

Rafal