[ExI] Price changes and regulation/was Re: Psychology of markets explanations

Stathis Papaioannou stathisp at gmail.com
Fri Jul 3 17:05:17 UTC 2009

2009/7/3 Dan <dan_ust at yahoo.com>:

> That said, your point might still apply, but some individuals do have better information, pay closer attention, know what to look for, or are just better at predicting market outcomes.  EMH presumes all actors pretty much have the same information, do the same things with it, have the same motives, and aim for the same outcomes.  Were this so, one wonders why there would be any trading at all, especially in assets.  After all, if everyone held the same views and had the same information about asset prices -- even if this information were imperfect -- wouldn't one expect them to have exactly the same behavior?  Why would there be, e.g., both short and long positions on a given asset?  Would would someone sell call or put options and another person buy those?  Why would anyone sell or buy futures?

I don't think the EMH assumes everyone thinks the same. Given a piece
of information, the degree to which different traders regard it as
positive or negative will determine the share price. This is what is
meant by the claim that the market takes into account all the
information: it takes the information and weights it for credibility
and impact, according to what the market participants believe. There
is in general no better way to make this assessment unless you are
privy to special information that the market lacks.

> And, as a final escape, you might admit people have different visions of the future (e.g., whether IBM will trade higher or lower today) and different information, that this still wouldn't lead to anyone making a profit.  Yet it seems, empirically (and is not ruled out by correct theory), that some people do not just hold different predictions but actually hold better ones.  (Yes, there are also lucky people, but luck would, all else being equal, evaporate over the long haul, no?)

Studies of fund managers and stock pickers do in fact show that it is
just luck which evaporates in the long run. There will always be those
who appear to beat the index average time after time, but you would
get that if you had a large number of people trying to predict the
outcome of any series of random events. Given a thousand people trying
to predict coin tosses, there will likely be one who predicts ten in a
row correctly; but this person still has only a 1/2 chance of getting
the 11th one right.

Stathis Papaioannou

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