At 11:16 AM 4/4/2002 +0530, you wrote: Hence it is very difficult for me to >understand how people can believe Efficient Markets Hypothesis especially >when its assumptions are so flawed ( rational people, no information >asymmetry !). > >I am never able to understand why there is so still so much heat generated >to this day. I have a counter point. Can somebody first prove that the >assumptions behind efficient markets hypothesis are true ? That today's man >is no longer driven by greed and fear and is rational (at least when it >comes to investing !!) ? That actually everybody knows as much about >companies and no one has an information edge ? If this cant be proved how >would a theory built on these foundations be true ? > > Not everyone in an efficient market need be rational or informed -- just enough to spot and arbitrage transitory mispricing -- a point I made in my last post. There has actually been experimental evidence that a budget constraint is sufficient to generate rational pricing in a market with irrational participants. Unfortunately, I don't recall the citation.
Also, few actually believe in "strong form" market efficiency where even inside information is priced in an unbiased manner (although rational expectations could induce unbiased expectations about hidden inside information!). Aside from that, what information asymmetries are you talking about? Again, not everyone in the market needs to be equally informed to obtain rational equilibrium prices. Now I will be so controversial as to invoke Milton Friedman's instrumentalist methodology, which asserts that the realism of assumptions is of secondary importance compared with the predictive power of the theory. In other words, the proof is in the empirical pudding. And when the scientific method is applied, the jury is out, as I asserted in my last post. Finally, I must express much dismay at the willingness of list members to assert pervasive irrationality -- presumably implying that the (neoclassical) economics paradigm, founded on the assumption of rational choice is not an appropriate way of viewing the world. After all, this listserve is named after a delightful book which applies the economic approach to anything and everything! To me, what defines an economist -- armchair or otherwise -- is the willingness to apply the economist's way of thinking to all kinds of empirical problems and puzzles and hopefully be able to tell a plausible story with refutable and testible implications. > > >__________________________________ > >----- Original Message ----- >From: "Kevin Sachs" <[EMAIL PROTECTED]> >To: <[EMAIL PROTECTED]> >Sent: Thursday, April 04, 2002 1:32 AM >Subject: Re: Securities analysis > > >> At 11:24 AM 4/2/2002 -0800, you wrote: >> >> >Information does not instantly get propagated to all participants in a >> >market, so there are profit opportunities for those who study market >> >patterns. >> > >> It is not necessary that all market participants be informed for a capital >> market to be informationally efficient. What is necessary is that there be >> some informed traders that will spot transitory mispricing and that those >> informed traders be able to act on the information quickly (i.e., that >> transaction costs be low). The jury is still out on the scientific >evidence >> supportive of or contradictory to efficient market theory. It is >noteworthy >> though, that evidence of market efficiency anomolies seldom demonstrates >> the existence of trading rules that yield genuine abnormal profits. >> >> ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ >> Kevin D. Sachs, Ph.D. >> Assistant Professor phone: 513.556.7198 >> University of Cincinnati fax: 513.556.4891 >> Department of Accounting/IS email: [EMAIL PROTECTED] >> 302 Lindner Hall, P.O.Box 210211 >> Cincinnati, OH 45221-0211 >> ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ >> ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnati fax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
