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Debunking the Efficient Market Hypothesis

From The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy, by George Cooper:

The idea that markets are efficient requires the following to hold:

  1. Asset price bubbles do not exist; the prices of all assets are always correct.
  2. Markets, when left alone, will converge to a steady equilibrium state.
  3. That equilibrium state will be the optimal state.
  4. Individual asset price movements are unpredictable.
  5. However, distributions of asset price movements are predictable.

Unfortunately, in reality, the data doesn’t fit the theory. Markets are not normally distributed. Asset bubbles do form and burst, with ever increasing frequency. Markets have experienced extreme discontinuities, and a static stable equilibrium has never once been observed in economic history.

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One thought on “Debunking the Efficient Market Hypothesis

  1. Economics is a Psudo-Science.
    Most of it is just Rorschach hokum.

    If the market was in stages of grief: what stage is it in?

    Denial
    anger
    Bargaining
    depression
    acceptance

    And where in this cycle are the dislocations going to stabilize?

    All of Obama’s horses and all of his men, have yet to put Humpty Dumpty back together again… You have to ask, Why does anyone think that electing a president, or a treasury secretary. will make people eat fritos and make Pepsi stock go up. How exactly was geitners plan going to make people eat frito’s in Q4? If you want Inefficient markets, that is a huge dislocation.

    When is it that we are hiding under the covers, hoping that somebody will save us? When is it that we are sick of Hiding and come out of our depression?

    But certainly, when we are resigned to our fate, and nobody can save us…
    by that point Everybody who is willing to sell has sold.

    You also have to wonder “Why in the Hell, has EVERYONE been so Crazy for the past weeks.”

    There is so much great work that has come out of MIT and Stanford. That is so heads and tails over the crazy Austrian and Chicago schools of economics. It’s like the difference between The Copper Age and Industrialization.(there is no similarity between industrialization and modern economic thought.)

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