[gnaritas]

> The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true.

That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked. Markets are not efficient and all data is not priced in. Information is not absorbed quickly into the market so inefficiencies crop up everywhere all the time, those are the profit opportunities that traders make a living off of. If EMH were correct, the systematic risk that crashed the market could not have occurred. Remember, it's a hypothesis, not a theory.

[lutusp]

> That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked.

Not at all. The EMH isn't falsified by people engaging in widespread cheating, and it isn't falsified by big market reversals driven by public psychology. It could only be falsified by the market's inability to accurately set a price on average, across all equities, perpetually.

Does an airline disaster contradict the claim that air travel is safe? No, that can only be contradicted by average flight outcomes. It's the same with the equities market.

> Markets are not efficient and all data is not priced in.

This claim is obviously contradicted by the fact that people are willing to use equities to raise business capital. If the market wasn't efficient, they would think of another way to raise capital -- something more efficient. That's hardly controversial.

> If EMH were correct, the systematic risk that crashed the market could not have occurred.

The EMH isn't falsified by cheating. Does the fact that insider trading takes place contradict a hypothesis that a market without cheating is fair and efficient?

> Remember, it's a hypothesis, not a theory.

Yes, and it can never be a theory in the scientific sense -- there's no way to gather objective data in a controlled way. It will probably remain a hypothesis in a pseudoscientific twilight zone forever. But given all the alternatives, the fact that people invest in the equities market argues for the truth of the EMH -- in an unscientific and dubious way.

[darkmighty]

Efficient market hypothesis discussions are pointless imo, because it's obviously untrue, and obviously approximately true. It's trivial to create cases for both but there's not a credible test to how good the approximation is, what are it's failure modes and critical points, where the inefficiencies are amplified, and so on.

In the end it's just an assumption in economic papers so they can be correct in some sense.

[lutusp]

> Efficient market hypothesis discussions are pointless imo, because it's obviously untrue ...

So cash in. Since you think the EMH is "obviously untrue", you can drain the market of its capital based on your proven theory and your inside track on the truth.

In fact, plenty of evidence suggests that the EMH is true, but that the present equities market can't reliably demonstrate this fact because of widespread cheating.

I should add that, because of the nature of equities trading and markets in general, it's very doubtful that anyone will ever prove this issue one way or another in a scientific sense.

[grey-area]

you can drain the market of its capital based on your proven theory and your inside track on the truth

irrational != predictable ∴ markets cannot be accurately modelled

the EMH is true, but that the present equities market can't reliably demonstrate this fact because of widespread cheating

real markets != efficient and real markets != fair ∴ EMH is false for real markets

[magnusjonsson]

Side remark: Please don't use equality and inequality like that. How can a noun and an adjective possibly be equal? They aren't even the same word class. Just use english "is" and "is not" to connect your nouns and adjectives。

[bitcuration]

true? (is == equality)

don't think so.

[grey-area]

The EMH isn't falsified by people engaging in widespread cheating, and it isn't falsified by big market reversals driven by public psychology. It could only be falsified by the market's inability to accurately set a price on average, across all equities, perpetually.

Apparently it can't be falsified or proved before the heat death of the universe, so not a very interesting or credible hypothesis.

This claim is obviously contradicted by the fact that people are willing to use equities to raise business capital.

jjarmusch, who is inexplicably hellbanned below as I post this, makes the point that people willing to use equities to raise money do not depend on an efficient market, in fact they profit from a broken or delusional market. So no, people using a market does not prove it is maximally efficient or even close.

The EMH isn't falsified by cheating.

No, it's falsified by comparisons with real markets which it attempts to model (which include cheating, stupidity and greed as well as occasional rational valuations).

[lutusp]

> Apparently it can't be falsified or proved before the heat death of the universe, so not a very interesting or credible hypothesis.

If that were true, if unprovable hypotheses had no practical value, psychology would collapse. Wait ... hold on ... nope, psychology isn't collapsing.

> So no, people using a market does not prove it is maximally efficient or even close.

You're missing the point that money flows to the most efficient of alternative capital raising methods -- which, if you think about it, also stands as evidence for the EMH. Given the freedom of businesses to choose any method to raise operating capital, and given that they prefer equities, this shows that the equities market is more efficient than existing alternatives.

If the equities market were less efficient than brand X, businesses would raise capital using brand X. How is that difficult to understand?

> No, it's falsified by comparisons with real markets which it attempts to model ...

You are apparently unaware that the EMH isn't compared to real markets, it's the other way around. And if businesses believed that equities were inefficient compared to anything else, they would change methods.

[gnaritas]

Your faith in EMH is looking religious. You're making assertion after assertion without evidence or sound reason. Because businesses choose to raise capital in equity markets does not show that EMH is true. It just shows that the markets are more efficient than the alternatives, it does not mean the market is efficient.

[grey-area]

You are apparently unaware that the EMH isn't compared to real markets, it's the other way around.

So in the best of all possible worlds, the EMH is true, but we don't live there.

[chalst]

The case that subprime mortgages were in a bubble was made very efficiently in public by several people - I was subscribed to Nouriel Roubini's widely followed blog at the time; Gillian Tett at the FT also did good work exposing what was going on with property prices - and believed by many people. The bubble continued for years after it had convincingly been called.

However, relatively few people figured out how to efficiently make use of this information. Shorting the stocks of banks like AIG is very high risk, and can cost you everything if you don't know when the bubble is going to burst. In the end, the only shorting strategy that was effective was to use CDS, a newly popular derivative (which was a very smart idea). Jon Paulson's hedge fund made $15 billion from this, but Kyle Bass, another person who made money from this, says only 15 people figured out the CDS trade and made money from it. The amount of shorting that happened was tiny in proportion to the size of the bubble.

The EMH is a hypothesis that was contrived in an analysis that does not take account the actual way that information gets incorporated into prices, the actual trades available to market participants, or the asymmetry between upside and downside risks (aka. the Keynesian risks of opposing the market's animal spirits).

The EMH states that market prices correctly price in all public information. The weaker proposition, that it is hard to get rich quick from spotting market mispricing using just public information, does seem to be true.

[Guvante]

> Markets are not efficient and all data is not priced in

EMH says that all publicly available data is priced in. The strongest form claims all data, but no one believes that (insider trading alone debunks it).

I would postulate that given the data available right before the crash, you would probably end up with similar results to what the pricing was at the time.

Note that one thing people have a hard time understanding with EMH is externalities, such as enthusiasm or whatever the opposite is called for a product or class of product.

> those are the profit opportunities that traders make a living off of

EMH relies on people making a living to function, the price setters need to do well or else enough won't be attracted to make the market efficient. You are correct that this kind of problem makes anything but the weakest form difficult to prove.

> the systematic risk that crashed the market could not have occurred

Why? One major factor in the crash was that people started walking away from their homes. Historically this didn't happen. If all of the data points to stability in mortgages, you cannot expect people to divine that problem, nor does the EMH require them too.

[lutusp]

> The strongest form claims all data, but no one believes that (insider trading alone debunks it).

Insider trading doesn't "debunk" the EMH, because the EMH is predicated on fair dealing. There's a lot of distorted ideas about the EMH, for example that a market crash, or cheating, disproves it. These events don't disprove the hypothesis.

[gnaritas]

> These events don't disprove the hypothesis.

Then the hypothesis is useless and false. You can't claim markets are efficient and then exclude all evidence to the contrary.

> because the EMH is predicated on fair dealing

Yes, which makes EMH false in the real world. A hypothesis that's only true in an ideal world isn't useful nor is it meaningful in the real world.

[Guvante]

> A hypothesis that's only true in an ideal world isn't useful nor is it meaningful in the real world.

You are not treating EMH like you should, think of it as a guideline not a hard and always true rule of life.

For instance lets say Telsa is trading for $100 and you think it is worth $50, there are two reasons for this, either:

* The market is not efficient and you should take advantage. * The market is efficient and you aren't considering all of the variables.

In almost every conceivable case it is the latter. The answer for Tesla is probably optimism for the technology when optimism often drives prices above the otherwise expected value.

EMH makes you consider the market as the baseline, which greatly helps steer you towards what is going on.

[gbasin]

Your understanding of the claims of EMH are flawed. On the other hand, the true claim is not easily tested. The best test exists in the form of looking at how easy it is to turn a consistent profit from transacting in open and liquid financial markets. Answer: not easy

[gnaritas]

Not easy isn't equal to not possible. Math isn't easy for most people, that doesn't disprove math. If the claims of EHM cannot be tested, then EMH is obviously nonsense.

[wolframarnold]

Agreed. In fact markets can from time to time exhibit systemic inefficiencies. What this means is that the very fabric of the market itself can give rise to bubbles or crashes. A brilliant book that I found an eye-opening read is by Didier Sornette, a physicist by training, "Why stock markets crash," circa 2003.