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If the markets were always efficient, bubbles would never form. The problem with the Efficient Market Hypothesis is that it cannot take into account individual human and human-herd behaviour. A better way to analyze the markets would be using Benoit Mandelbrot's fractal analysis and chaos theory. He wrote an interesting book that covers such a topic.
Another book explores the same topic but in a less rigorous manner. Akerlof and Shiller take on "animal spirits" (Milton Keynes coined this term) and markets.
while markets are good at digesting information it doesnt mean the information its digesting is correct information.
if you look at a broader time line than just in the moment then yes like water stocks level out at their correct level but not short term. .
look back at old long term charts spanning years and you go why of course the markets were down look at what happened over that time period. like looking at a chart of 2000-2010 and going of course the charts correct ,we had to back to back recessions.
eventually the mis-information goes away and things go back to where they should and the bubbles gone.
so in answer yes i believe markets are efficiant longer term but not short term.
For most investors, the belief in riskless returns is like the belief in Jesus. Empirical arguments don't sway them. It's a matter of faith.
That aside, computers have fundamentally changed the investing landscape. Now, even arbitrage programs are ubiquitous. The real frontiers are programs that datamine/predict market sentiment into the future or reverse engineer the trading strategies of other hedgefunds/market movers. A large portion of trading volume is no longer based arbitrage opportunities, but the statistical guesses on other major investors' trading positions. This takes place over microseconds. An evolutionary system at its finest.
A human trader is better off doing other things, or investing in areas with more asymmetrical information.
-EMH, and most of academic finance is too clean for the real world. How does EMH explain Lehman Brothers or Bear Sterns at $60 or $70. Then in a few weeks, they go to $10!!
The fundamentals didn't really change. Weren't the CEO's of those companies coming out when the stocks were at $20 and $30 saying everything is fine.
One flaw in EMH is assuming that all information is true and knowable. Look at the rating agency scandals. How does EMH explain Fannie Mae? That was not "efficient".
I think for most stocks, like MMM or IBM, if you're trying to guess if a new product is going to make the stock go up or down, then the markets are fairly "efficient". Velma's detection skills would come in handy figuring out which drug Pfizer is going to make next. That would be valuable.
The financial crash of 08 sliced EMH to pieces IMO, if it wasn't there already. How does oil go from $140 one summer to $35...information alone doesn't account for the price drops.
No one cheats or steals in academic finance books. Everyone is "rational", acting in their best interest, etc. Crazy. Computers haven't changed supply and demand.
i guess you can say the markets reacted to information about lehman that wasnt known yet . those black swan events are events not on anyones radar that pop up and give a brand new perception to something .
i would think one could argue that the efficiant market system is re-leveling itself to new perceptions.
I think taken over a macro view markets are inefficient but on a global view, things are pretty predictable. World population increase begets increase in needs for services and material, as does industrialization.
Chaotic information and the speed at which information flows has dramatically changed the landscape. Quant algos have also made things more complicated. It's my view that small time investors cannot and should not play short term.
A sibling of mine who works on the commodities exchange in Chicago told me a story once where information about the orange crop in Florida were due to be released. The information is released electronically so quant algos basically can within milliseconds start doing "appropriate action."
Well, the information came out, and his firm (which doesn't believe in quant algos when dealing with commodities or something like that) looked at the numbers and said "that has to be wrong" whereas the quants sold like crazy. Well, within a few minutes they re-released the numbers and they misplaced a decimal.
Oops. Their firm made a killing. The quants were destroyed.
So, short term, no, markets are anything but efficient. Long term, and using the proper mindset, they are predictable.
I think taken over a macro view markets are inefficient but on a global view, things are pretty predictable. World population increase begets increase in needs for services and material, as does industrialization.
Chaotic information and the speed at which information flows has dramatically changed the landscape. Quant algos have also made things more complicated. It's my view that small time investors cannot and should not play short term.
A sibling of mine who works on the commodities exchange in Chicago told me a story once where information about the orange crop in Florida were due to be released. The information is released electronically so quant algos basically can within milliseconds start doing "appropriate action."
Well, the information came out, and his firm (which doesn't believe in quant algos when dealing with commodities or something like that) looked at the numbers and said "that has to be wrong" whereas the quants sold like crazy. Well, within a few minutes they re-released the numbers and they misplaced a decimal.
Oops. Their firm made a killing. The quants were destroyed.
So, short term, no, markets are anything but efficient. Long term, and using the proper mindset, they are predictable.
Wow, sounds like the modern day version of Trading Places. Except that Winthrop and Valentine would have gotten their ass handed to them.
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