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Comment by raganwald | Hacker News Reader

Can you say for a fact that if they priced at $46 that people would have bought at $46? Markets are highly irrational.

What does it mean for a market to be "highly irrational"? Normally the term "irrational" is applied to actors, while "efficient" refers to markets.

Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.)

Incidentally, when an actor behaves irrationally in an efficient market, this happens:

https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=0&...

I believe the counter argument to a money making inefficient market strategy is "I'm just a little guy and the big evil bankers won't let me make money".

I don't know if he is, but I would certainly suggest that markets are not efficient. Not even close. Google had a 40 billion dollar swing in valuation in a day last month. Were they really worth 40 billion more that day? Apple lost 300 billion in market cap in a matter of 6 months. Either they weren't worth that much at the peak, or they weren't worth that little at the bottom. There is no way you could ever convince me that Apple was efficiently priced at both ends (most likely neither end).

Knowing that the market is inefficient is not equivalent to knowing which stocks to buy or sell, or when to do so. It doesn't give you a magic formula, but it does give you some idea of what to look for.

FWIW, I have done pretty well picking stocks for myself, but I'm far from what I would consider "extremely wealthy". That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.

You seem to be using a definition of "efficient" that has some sort of moral or intuitive meaning. That's not the relevant definition. It's really something more like "the market will not exhibit large-scale persistent arbitrage opportunities", which is why showing the market is inefficient pretty much by definition requires you to produce a method to consistently make substantial quantities of money by exploiting the arbitrage opportunities you found.

Market efficiency is not a moral concern; it's more like a physics observation.

In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.

According to investopedia[1] - An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

At the very least, if not me, Warren Buffett has shown that the market does in fact exhibit large-scale persistent opportunities. You just have to be patient. I don't think "arbitrage" is actually the relevant term here. It has a very specific meaning that isn't simply a stock being mispriced. Really though, the market offers deals all the time.

FWIW, I don't have Buffett's track record, but I currently have 20 stocks in my portfolio most of which I've held for several years. Of those, 19 have made money and 1 has lost a small amount, and on the whole I've beaten the market nicely. I could just be written off as lucky, or as about to lose lots of money, but how do you explain Buffett? He has a track record of consistently beating the market by wide margins for 50 years. Seems like that wouldn't be possible under EMH.

[1] http://www.investopedia.com/terms/e/efficientmarkethypothesi...

"Opportunities" is not "arbitrage". The value of an item going up over time is not disproof of a market's efficiency; efficiency is a point-in-time characteristic, not an across-time characteristic. A market is not required to be psychic to be efficient. It especially doesn't pertain to the case where someone generates value; Warren Buffet is not a passive purchaser of stocks, Warren Buffet seeks out stocks where he can generate value in some manner with better management.

As for your positive returns, the easiest explanation is that you're in a green square on this graph (suitably updated): http://www.nytimes.com/interactive/2011/01/02/business/20110... (Read what the graph is carefully, most people misinterpret it at first glance.)

>According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices...

...on average. Which is what makes "beating" the market, over enough time, impossible.

But we know there are pricing discrepancies and information asymmetries in finite periods of time because we see them every day.

That's one of the main problems with the efficient market hypothesis, actually.

The EMH is false for values of "efficient" that are interesting, and the values of "efficient" for which it might be true are boring and useless in the grander scheme of things.

A lot of needless bad blood enters discussions because everybody interprets the word "efficient" as they please.

> That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.

But I'd be selling it, and you can find out how by buying my book for the low, limited time price of three payments of $99.99. If you act now, we'll also throw in this great place-mat shaped like a $3 bill, and a ring-tone for your phone that sounds like money. Just pay separate shipping and handling. <insert three thousand word disclaimer here>

What if I were able to prove that markets are inefficient because efficiently pricing securities is an NP-complete problem? Well, sure, maybe a strategy exists, but if it requires solving an intractable problem then I'm not about to get rich off of my proof ;)

Yes, David Pennock has had these results for a while. The economist would merely argue that results which are computationally intractible are equivalent to information which does not exist. And the computer scientist would point out this doesn't mean markets can't approximate efficient with a high degree of accuracy.

> Markets are highly irrational.

That depends which recent Nobel Memorial Prize winner you believe.

Which one claims that all actors in a market have perfect information?

I'm guessing parent's talking about Eugene Fama, who shared the prize with Robert Shiller.

He doesn't actually claim the markets have perfect information, just that the price always reflects all available information. In essence, you can't "beat the market" consistently, assuming you have the same information.

> assuming you have the same information

Which you don't, since Goldman Sachs is always a few milliseconds ahead of everyone else. Given that almost everyone else out there is going to be trading on information that has already been consumed and acted upon by privileged parties, the markets may as well for all intents and purposes be irrational.

In this world of quant-bots, I don't know how anyone can argue that we have a fully rational market.

My understanding is that much of the progress in economics has been merging economics with psychology to identify rational failures.

"Homo economicus" is still really important for macroeconomics. The reason for this is pretty simple: designing rich, large models is still hard to do and the practical limitations introduced by basing your assumptions on the idea that people act irrationally instead of rationally can make things too complicated to be of practical use.

So in microeconomics or small models, people can practically accept and implement these (pretty obviously true) ideas that people don't behave rationally. But in large scale macroeconomic models it's hard to do. It would certainly be a lot easier if people just acted like computers...

The issue is not just that models are hard. The claim of some economists is that while people behave irrationally, not everyone behaves irrationally all the time, so the issue is self-correcting as long as you have enough liquidity and participants in the market.

It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.

If people make biased (http://en.wikipedia.org/wiki/Bias_of_an_estimator) guesses you will still have a problem. I think that's often what's meant by "rational": that people, in aggregate, make unbiased guesses.

The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.

Most of the time it's like that, but sometimes you have a situation like nominal loss aversion/sticky wages where humans are very consistent about their irrationality and that irrationality has very important effects.

http://en.wikipedia.org/wiki/Sticky_wages

http://econlog.econlib.org/archives/2013/09/why_dont_wages.h...

Simplifying models has always struck me as a particularly dangerous idea in economics, since a lot of the time it's actually profitable for economic actors to deliberately exploit the difference between your assumptions and reality.

Quant bots make the market better by increasing liquidity.

I've always thought that's a sketchy claim. The market would have sufficient liquidity without the bots.

More importantly, they're a huge waste of resources that produces nothing of economic value.

There's no such thing as sufficient liquidity.

I believe the argument (massively simplified) goes that if the market were truly irrational someone would be able to reliably beat it and there's not much evidence that that has happened.

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