[ExI] Price changes and regulation

Stathis Papaioannou stathisp at gmail.com
Tue Jul 7 12:10:58 UTC 2009

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

> Aren't you just arguing around my point?  Not everyone on a real market has the same information.  Not only are there differences in highly available information people are aware of, but some people have specialized information -- some of it, of course, they might be forbidden to use under current law -- that others lack.  (There's a vast literature on informational assymetry too.)

Sure, you can make money if you have special information - that's
called insider trading, and is usually illegal. You can possibly make
money if you are quick with the mouse when the publicly available
information becomes known. For example, if there is takeover offer for
a company announced at $10 the share price will immediately move to
around that level, but there may be a few sell orders already in the
system at $7, and you may be lucky and pick these up before the
sellers change them. However, you can't rely on this as a winning

> If you're just going to reduce EMH down to markets are efficient because they deal well within the constraints of imperfect information, information assymetries, market actors who are not pure homo ecnomicus types, time lags, etc., then I think you've watered it down enough so that it's impervious to criticism.  Don't you agree?  At that point, too, it says nothing important that wasn't already noted by people like Mises decades before EMH was formalated.  Surely, that's not what the people who came up with EMH were after?!

The EMH stands in contrast to the stock pickers who think that, based
on various fundamentals, they can beat the market. For example, the
Benjamin Graham / Warren Buffet inspired value investors think they
can pick stocks that the market has irrationally knocked down in
price. But it is the very presence of such investors that is the
undoing of this strategy, since they will limit how low a stock will
fall. And there is also the possibility that a stock has fallen to low
P/E ratios for good reason, and future earnings will suffer; or
conversely, that an apparently overpriced "growth" stock really does
have good prospects.

> Yes, I've heard, but yet there are people like Buffet or people who run firms who do stick around for the long haul.  Now, it's possible that these people are just the really lucky types.  But this seems very unlikely given the knowable odds here.  Don't you think it's much more likely that, within limited scopes, there are some big differences in ability to forecast?

If there is something in ability to forecast markets, then you would
expect that across the board people in the know will do markedly
better than total novices. After all this applies to any other field
of expertise: even an incompetent mechanic will have more of an idea
on how to fix a car than someone who has never seen an engine before.
But this doesn't seem to apply with investing. Very knowledgeable,
very experienced, very highly paid analysts and fund managers on
average do no better than blind luck in picking winners. In this
respect, they are more like astrologers than mechanics.

Stathis Papaioannou

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