Monday, February 15, 2010

More EMH Bashing - interesting points

A decent read about the issues with EMH. During the last three years EMH has taken a hit, similar to the hits it has taken during previous down turns. Yes there will be some interesting data points to make the EMH better but, I suspect the underlying principle will stay intact.

On the limited value of informational efficiency vs allocative efficiency:

[Prices may indeed contain "all relevant information" but this includes not just beliefs about earnings and discount rates, but also beliefs about "sentiment and emotion." These latter beliefs can change capriciously, and are notoriously difficult to track and predict. Prices therefore send messages that can be terribly garbled, and resource allocation decisions based on these prices can give rise to enormous (and avoidable) waste. Provided that major departures of prices from intrinsic values can be reliably identified, a case could be made for government intervention in affecting either the prices themselves, or at least the responses to the signals that they are sending]

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