- ‘The function and nature of markets’ on boundless.com.
In their efforts to jam the square peg of financial theory into the round hole of human nature, economists have perpetrated some pretty stupid things. But few of them are dumber than the efficient market hypothesis. EMH states that it is impossible to beat the market because the efficiency of the market means that prices always incorporate and reflect all relevant information. Why was the Dow Jones Industrial Average worth 22.6% less on Tuesday October 20th 1987 than it had been the previous day ? Why is Warren Buffett worth $67 billion ? Must be all that efficiency.
George Soros (estimated net worth: $25 billion) is also a pretty good refutation of the efficient market hypothesis. As a student at the LSE, Soros chose the Viennese-born philosopher Karl Popper as his tutor. Popper argued that empirical truth can never be known with absolute certainty; scientific laws can never be conclusively proved, they can only be given provisional authority, until some better theory intercedes. No amount of confirmation is sufficient. One failed test is enough to falsify.
“While I was reading Popper I was also studying economic theory and I was struck by the contradiction between Popper’s emphasis on imperfect understanding and the theory of perfect competition in economics which postulated perfect knowledge. This led me to start questioning the assumptions of economic theory.”
Buffett’s refutation is less elegant, but equally effective:
“I’d be a bum on the street with a tin cup if the markets were always efficient.”
…click on the above link to read the rest of the article…
