A crucial point that efficient-market proponents tend to overlook... http://www.johnkay.com/2010/07/21/it-may-be-a-rembrandt-to-you-but-markets-can-beg-to-differ/
It may be a Rembrandt to you, but markets can beg to differ 21 July 2010, Financial Times Wherever there is uncertainty, market prices reflect the beliefs of those who are more than averagely sanguine. The result is a reserve of illusory value, constantly depleted by events and replenished by fresh uncertainties. One of the great insights of 18th-century economics was that exchange can benefit both parties to a transaction. Since then, the mercantilist view – in which trade is a mechanism by which one party tricks the other into giving up something valuable for inadequate recompense – has disappeared from economic theory, if not popular discourse. Exchange takes place for many different reasons. Gains from trade are typically the product of differences in capabilities or preferences. Rembrandt is a skilled painter while I am a knowledgeable economist. He gives me a picture in return for economic expertise. (If you think this is not a good deal for Rembrandt, you do not realise how inept he was in managing his finances.) Or, you and I are both hedge fund managers, but I admire Picasso while you prefer Rembrandt. If my collection includes Rembrandts, and yours Picassos, then we each gain from exchange. Beneficial exchange is possible whenever there are different perceptions of the value of the same object. Such an opportunity may be the product of differences in tastes. (We both agree that a painting is a fine example of Rembrandt’s work, but I like it and you don’t.) Or the difference in perception may be the result of uncertainty. (There is considerable dispute about which of the many works of the school of Rembrandt were actually painted by the master himself. I think the painting is probably a genuine Rembrandt, and you are not so sure.) But the possibility that trade might be mutually beneficial does not mean it actually is... -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
