RE: U of Cal scientists question efficient market hypothesis
--- Alypius Skinner [EMAIL PROTECTED] wrote: A statistical physics model is predicting that the US stock market recovery suggested by recent rises will only last until spring next year, before tumbling yet further. Why would this contradict efficient markets? If this prediction is correct, there will be more doubt about the efficient market theory. But it won't disprove the theory, since further predictions need to be made from the model for this model to be considered accurate. And, of course, if the model IS accurate, today; and is thought to be so, such that money can be made based on its predictions, then certainly in the near/ mid future (2-4 years?), the behavior of money maximizing agents will change to incorporate this model's results -- and in the process nullify the money making opportunity, or at least greatly reduce the opportunities. Even if the model is accurate today, for the near future -- it will become inaccurate as human actors adjust their game-playing strategies. (While a free market is not zero-sum, nor the stock market, quite--it seems pretty close in the short term) A Random Walk Down Wall Street by Burton G. Malkiel, basically claimed, empirically, that the markets were fairly efficient. Irrational Exuberance, by Robert J. Shiller By history's yardstick, Shiller believes this market is grossly overvalued, and the factors that have conspired to create and amplify this event--the baby-boom effect, the public infatuation with the Internet, and media interest--will most certainly abate. amazon review of the book published in March, 2000 -- around the beginning of Great Fall. Funny, there doesn't seem a single date for the begining of the internet bubble collapse? Greenspan made the remark at the end of 1996. He, and many others, thought (knew?) the market was overvalued. http://www.allianceforlifelonglearning.org/course.jsp?c=2105 A course! by: Course Author: Robert J. Shiller, Stanley B. Resor Professor of Economics, Yale University, Yale University Profile Online Instructor: Andrey D. Ukhov; Sunil Gottipati; Chian Choo $250 tuition, $35 material (book out of stock, maybe this is why?) It has always seemed to me that the greater fool theory is incompatible with market efficiency. I think so too; and there are two main issues not well incorporated into the efficient market theory (or my brief hobby economists' view): 1) timing -- how long can a market be temporarily and inefficiently priced? 3 years? (1996-1999?) 2) principal agent theory -- what happens when the agents in the market who are paid to provide, and trusted to provide, accurate information (like H. Blodget*), but have a huge personal economic incentive to mislead? USA Today: On several occasions, Blodget was publicly bullish on stocks that he dismissed as garbage privately. Most of the companies were giving Merrill investment banking business. (4/14/02) The markets may or may not be efficient, but the term must be defined in some way that has enough objective meaning to be analyzed and tested. Actually, as is often the case, non efficiency is assumed, in some theory, and then disproven. As I think will happen to the anti-bubble theory, if it tries for too many predictions. Tom Grey AEI quote: The problem with the incessant push for the public to buy equities is that it ultimately leads to lower returns. If everyone obeys the exhortation to buy stocks, share prices will be driven up so high that expected returns on equities will collapse at the first sign of doubt about earnings prospects. The further stock prices rise, the further they subsequently fall given anything but improving news on earnings, as they have done since March 2000. As this Outlook goes to press, the NASDAQ Index is now at approximately 1400, down from 5,100 in March 2000, having fallen by 73 percent in just thirty months. The broader SP Index has fallen 32 percent, at an average rate of 14.6 percent a year, since early March 2000. * Merrill Lynch's famed Internet Bull made his reputation by setting a price target of $400 on Amazon.com when it was trading at $243.
Re: U of Cal scientists question efficient market hypothesis
--- Alypius Skinner [EMAIL PROTECTED] wrote: If prices really are going up for a period of time solely on expectation that someone else will always be willing to pay prices even more unjustified by business fundamentals than the price the previous buyer paid, then it would be possible to predict that the overbid stocks will inevitably move downward by a large amount. Yes, but: 1) Speculators often do not realize the market is a bubble. Prices are based on expectations of future demand, and that demand depends on future profits and other factors. For example, why is Amazon stock selling at a positive price, when it has been a river of no returns? Many share owners expect the company to make a profit in the future, or that the company will be sold at a higher price. That may never happen, but nobody knows for sure. People can expect higher future profits, and ex post this will seem unrealistic, but ex ante, nobody knows. It's not really greed, but hope, that creates momentum. 2) Many traders follow the trend. Trends can continue for a long time. So even though traders know the trend will peak out, nobody knows when, so traders keep buying. The problem is that the trend is not a straight line, but jagged, so nobody knows when a downturn is the major one or a temporary one. Markets can be efficient all the way up the trend and down the trend, because at each time and price, traders are using the available information. The problem is that nobody knows the future. Also, financial markets are not completely efficient, as knowledge has a cost, so it is sometimes possible to profit from knowledge even if it is publicly available. If that is what you mean by an efficient market then to say that securities markets are efficient becomes a tautology rather than a theory. If markets were not efficient, prices would not reflect yields and discount rates and competition. But they do tend to do so. So they are efficient, though not perfectly so. For example, if I want to buy an ounce of gold, I am not likely to find someone who will sell it to me at $200, and few would pay $400. The fact that most are buying and selling at a prevailing market price at some moment implies efficiency about the transmittal of information, about competition, and profit maximization. If the gold market were inefficient, we would see gold trading at widely different prices at the same time. But we don't see that. Over the long run and for most securities, returns tend to equalize relative to risk. So are you saying that the market pricing of some stocks are efficient, but not the pricing of others? No. I am saying that, ex post, resources are wasted in a company that went broke. But ex ante, investors and speculators don't know the future, and efficiency has to be looked at ex ante, where decisions are made. Also, a rise and fall in prices, by itself, does not imply economic inefficiency. At any price, funds are exchanged for assets. One person's gain is another's loss, and there is no net damage to the economy. Fred Foldvary = [EMAIL PROTECTED]
Re: Fw: Median voter theorem
--- [EMAIL PROTECTED] wrote: Proportional representation doesn't allow--or at least hasn't allowed--the fringe parties there to stop being fringe parties. David Yes, if by oligopoly you mean there are only a few parties, then proportional representation does not prevent that, as we don't see a distribution of just tiny parties. The question is why there seems to be a political duopoly in most countries. I think that may be due to the bell-shaped curve of political views. If most voters are near the median, we can expect a couple of large parties to split that vote. Fred Foldvary = [EMAIL PROTECTED]
Re: U of Cal scientists question efficient market hypothesis
If prices really are going up for a period of time solely on expectation that someone else will always be willing to pay prices even more unjustified by business fundamentals than the price the previous buyer paid, then it would be possible to predict that the overbid stocks will inevitably move downward by a large amount. Yes, but: 1) Speculators often do not realize the market is a bubble. If so, this amounts to an argument against, not for, the efficiency of the markets. Prices are based on expectations of future demand, and that demand depends on future profits and other factors. For example, why is Amazon stock selling at a positive price, when it has been a river of no returns? Many share owners expect the company to make a profit in the future, or that the company will be sold at a higher price. That may never happen, but nobody knows for sure. People can expect higher future profits, and ex post this will seem unrealistic, but ex ante, nobody knows. It's not really greed, but hope, that creates momentum. Hope as well as greed can reduce market efficiency. Hope and greed can drive either investments based on careful, rational analysis, or wild-eyed speculation. How realistic was that hope when Amazon was selling for well over $200 a share with zero earnings in a low-margin business while other well-financed companies preparing their own internet launch were selling for many times less and a modest P/E ratio? You still sound like you're arguing that any investment made with the hope of a future return (and that is all investments) contributes to an efficient market. As long as all investors hope to make money on their investments, this hope itself makes the markets efficient. Well, no, that can't be right. As the contrarians say, The crowd is always wrong. (Of course, if the markets really are as efficient as some people seem to think, then the contrarians are always wrong. My point is just that good intentions--the intent to make a profit--do not make a market automatically efficient, or efficient by definition.) 2) Many traders follow the trend. Trends can continue for a long time. So even though traders know the trend will peak out, nobody knows when, so traders keep buying. The problem is that the trend is not a straight line, but jagged, so nobody knows when a downturn is the major one or a temporary one. That's why trend traders trade with stops. Markets can be efficient all the way up the trend and down the trend, because at each time and price, traders are using the available information. Well, no. Most trend traders are pure or nearly pure technical traders. They willfully ignore most of the available information and concentrate exclusively or mainly on two factors--price and money management techniques. You can make money this way--in fact, a lot of money--but it does not contribute to market efficiency. In fact, very many trend traders in a stock or commodity ought to accentuate distortions in market pricing. The problem is that nobody knows the future. Also, financial markets are not completely efficient, as knowledge has a cost, so it is sometimes possible to profit from knowledge even if it is publicly available. Yes, they are not completely efficient, although many efficient market theorists seem willing to admit this only when backed into a corner. Are they inefficient enough to make more money than a buy-and-hold method over a long period of time? According to many random walk enthusiasts, after accounting for transaction costs, the answer is no, and they cite their own computerized backtests for evidence. On the other hand, many professional traders who have made fortunes from in-and-out trading will say yes. The question continues to be debated. If that is what you mean by an efficient market then to say that securities markets are efficient becomes a tautology rather than a theory. If markets were not efficient, prices would not reflect yields and discount rates and competition. But they do tend to do so. So they are efficient, though not perfectly so. For example, if I want to buy an ounce of gold, I am not likely to find someone who will sell it to me at $200, and few would pay $400. The fact that most are buying and selling at a prevailing market price at some moment implies efficiency about the transmittal of information, about competition, and profit maximization. If the gold market were inefficient, we would see gold trading at widely different prices at the same time. Not necessarily. You have already conceded that markets are inefficient to some degree, even though an asset will not trade at widely different prices at the same time. The question is, how inefficient is the market? Have any economists attempted to quantify this? I know of one swing trader, relying mainly on stock options to maximize leverage, who has more than doubled his trading account every year for the last six
Re: Fw: Median voter theorem
--- Alypius Skinner [EMAIL PROTECTED] wrote: we can expect a couple of large parties to split that vote. Fred Foldvary Polls show these positions are supported by large, not slim, majorities--landslide majorities. So why don't the two established parties seek to split the vote of the great majority on these issues--in other words, why aren't they competing for the median voter on the basis of the median voter's political opinions? I'm with you on that. There was a discussion here earlier on median voter versus special interests. My belief was and is that special interests have much clout, and override the median voters in such issues as you mentioned. That is partly because voters must select candidates on a package of issues. On such issues, the special interests can have clout, whereas the median voter is influential mainly in the most visible or basic issues. It does also show why the two political parties are close together on the most basic issues. Is there some way the market for votes could be made more competitive? Yes, see my paper on Recalculating consent: http://www.gmu.edu/jbc/fest/files/foldvary.htm Fred Foldvary = [EMAIL PROTECTED]
Re: A Short Review of *Hard Heads, Soft Hearts*
--- [EMAIL PROTECTED] wrote: Actually it would be interesting to hear someone delinate a clear distinction between taxation on money and taxation in kind. There is no clear distinction. Fred Foldvary there does seem to be, on some emotional level, a difference David There is no distinction between taxation in money vesus in kind as pertains to the act of taxation, i.e. taxation qua taxation. There are indeed differences in costs, based on subjective preferences, i.e. the utility of money relative to the item in kind. The burden on a horse of carrying a saddle depends not just on the weight of the load, but also how it the weight is distributed. Fred Foldvary = [EMAIL PROTECTED]
