A world where the Efficient Market Hypothesis is strongly real is a world without the

Discussion in 'Economics' started by JasonRhee, May 16, 2007.

  1. JasonRhee


    A world where the Efficient Market Hypothesis is strongly real is a world without the idea of the tooth fairy.
    As a child, everyone inevitably fiddles around with their first loose tooth until the story of the tooth fairy is heard. Upon learning of the benefits, you make a swift decision to grab some string and loop it around that tooth and tie the other end to a door handle. Patiently you would wait for someone to open that door, but in most cases you kick the door open yourself so you can collect that tooth, a symbol of benefit and take it to your bed at night to claim your reward from the tooth fairy.
    Going to school is just like that time you fiddled with that tooth, not knowing what to do with yourself, until one day, you find out about the rewards that can be reaped from attending a university and collecting a degree, so just like that time you looped a piece of string to your tooth, you enrol in a finance degree at university.
    Enduring the anxiety, stress and pain as you slowly progress through the years and before you know it, wham, the door is open and you have collected your degree.
    Armed with your finance degree you enter the financial world to offer your services as an enthusiastic financial analyst that is willing to learn the techniques and methods to achieve great rewards for your time spent as an undergraduate.
    Unfortunately, this is a world where the efficient market hypothesis reigns and you find that all the techniques such as technical analysis, charting and information collection are useless in helping you analyse and beat the markets to provide an incentive to prospective employers.
    You are left with an unsettling realisation that your years of study have become redundant and that there is no money under your pillow.
  2. It's funny that you should put the tooth fairy and the efficient market hypothesis on the same line. After all, believing in the EMH confines you to looking for pennies under pillows.
  3. I guess, if you think averaging 10%/year is pennies. I see a lot of hedge funds aren't doing much better than that and they're leveraged.
  4. Well what does that tell you? How efficient can a market possibly be when people are willing to put their money in a leveraged fund and be satisfied with a 5-10% annual return. That's indeed the return alot of those funds-of-funds are getting.
  5. I'm guessing that the market has not been kind to you lately. The tooth fairly analogy is not a very good one. No one is going to place consistently good returns under your pillow for merely token effort, not even the tooth fairy. On its own, a university degree, undergraduate or otherwise, is only one more bushel of undifferentiated wheat laid out across the landscape as far as the eye can see insofar as the markets are concerned. Now that you demonstrably sharpened your analytical capabilities, what are you going to do with them? Wait for the tooth fairy to reward you for just showing up, or actively try to distinguish yourself from all of the other identical bushels of wheat topped up with a sense of entitlement?
  6. stoked


    it didn't take graduation for me to find that out! if i could ch11 my student loans, i'd be a bschool drop out!
  7. hypothesis...

    yeah I should put a lot of credence in something only discussed in Ivory Towers and labelled "hypothesis" ...
  8. Wow!! :)
  9. see attached.
  10. nitro


    By my estimate, every year the market has been getting more and more efficient.

    Are there opportunities left? Imo yes, but unless fees (exchange, comission, etc) come down, soon the R/R will be negligible except for those that already have exceptional commission edge.

    Quoting Mark Rubenstein:

    Most importantly, the trader has to stay away from the boldened part above: assets that appear mispriced, but in actuality they are correctly priced relative to risk.

    "Mispriced" is a 2-dimensional vector field [at least], not a scalar field.

    #10     May 16, 2007