You have to admit that RE is very resilient. No matter what might seem to question it, it always turns out that according at least to its proponents like Sumner or Noahpinion, it turns out to be a feature not a bug.
"The EMH is approximately true; indeed it’s almost impossible for me to imagine any other model of financial markets. But it’s not precisely true, again, just as you’d expect. After all, if the EMH were perfectly true then no one would have any incentive to estimate fundamental values. We know people are imperfect and hence that any real world human institution, including markets, will be at least slightly imperfect.
http://www.themoneyillusion.com/?paged=3
Smith, who Sumner calls his 'Doppelganger' puts it this way:
"Now, the analogy between the EMH and Newton’s Laws is far from perfect. Newton’s Laws are wrong in a finite set of ways, under conditions that are predictable and well-known. The EMH, in contrast, is wrong in an infinite number of ways, and the set of the most important ways in which it’s wrong is constantly changing, as old anomalies are traded away and new ones crop up. Also, the EMH is actually a family of hypotheses, since you need a model of risk to specify it properly."
"If you do the math the performance gap is around 10%, even larger than four years of the 1.25% annual expense ratio for mutual funds that invest in hedge funds. They’d have been better off throwing darts."
However, Sumner takes a dim view of Buffett as well.
"But before Buffett gets too cocky, he might want to consider the final sentence of the article:
"The EMH is approximately true; indeed it’s almost impossible for me to imagine any other model of financial markets. But it’s not precisely true, again, just as you’d expect. After all, if the EMH were perfectly true then no one would have any incentive to estimate fundamental values. We know people are imperfect and hence that any real world human institution, including markets, will be at least slightly imperfect.
http://www.themoneyillusion.com/?paged=3
Smith, who Sumner calls his 'Doppelganger' puts it this way:
"Now, the analogy between the EMH and Newton’s Laws is far from perfect. Newton’s Laws are wrong in a finite set of ways, under conditions that are predictable and well-known. The EMH, in contrast, is wrong in an infinite number of ways, and the set of the most important ways in which it’s wrong is constantly changing, as old anomalies are traded away and new ones crop up. Also, the EMH is actually a family of hypotheses, since you need a model of risk to specify it properly."
"But like Newton’s Laws, the EMH is deep and fundamental. If you went through a wormhole and visited an advanced alien civilization, what would they think about financial markets? Chances are, they wouldn’t use the Capital Asset Pricing Model, or the Fama-French 3-Factor Model, or the Shiller CAPE. But I bet they would have some version of the Efficient Market Hypothesis."
So what could call it into question? Is it unfalsfiable? Sumner says no:
"Commenters often present me with market anomalies, which supposedly “prove” the efficient markets hypothesis is wrong. I always respond that they’re just engaging in data mining. They retort that no theory that can’t be disproved is worth anything. But the EMH can be disproved. The tests have been done, and it passes. Sort of."
"Finance professors have done many different tests of the EMH, and I’d guess 90% of the published tests (but only 5% of the actual tests) show that the EMH is wrong. (Yes, I’m pulling these numbers out of thin air, but you get the point.) They’ve found January effects, small stock effects and value stock effects. They’ve found the market does better when P/E ratios are low. They found the market does worse on rainy days (a study published in the AER!). Of course you’d expect to find 5 anomalies for every 100 tests you do, and for the most part you only get published if you find an anomaly, and finance professors have a lot of computer power, so . ."
http://www.themoneyillusion.com/?p=6872
Sumner isn't impressed by Warren Buffett-all those returns are just lucky. Interstingly, both Sumner and Buffett hold a dim view of hedge funds.
"Here’s another article showing the efficiency of markets:
Warren Buffett made a friendly bet four years ago that funds that invest in hedge funds for their clients couldn’t beat the stock market over a decade. So far he’s winning.The 81-year-old Buffett, who is chairman of the holding companyBerkshire Hathaway Inc. (BRK/A), ended last year neck and neck with the Protégé funds as the Vanguard fund climbed by 2.1 percent and the Protégé hedge funds lost an estimated 3.75 percent.The first two months of this year pushed the Vanguard fund ahead as stocks returned 9 percent, more than twice the gains of hedge funds.
"If you do the math the performance gap is around 10%, even larger than four years of the 1.25% annual expense ratio for mutual funds that invest in hedge funds. They’d have been better off throwing darts."
However, Sumner takes a dim view of Buffett as well.
"But before Buffett gets too cocky, he might want to consider the final sentence of the article:
Berkshire Hathaway shares have slumped almost 17 percent since the end of 2007."
"Ouch! Three years ago I argued that even if markets were perfectly efficient, they would look inefficient. That’s because for every 1,000,000 investors you’d expect one guy to outperform the market for 20 consecutive years. The masses would call that lucky guy a genius, even if he was just an average bloke from Nebraska."
"I predicted that after the lucky guy became the richest investor on Wall Street, his returns would no longer look so impressive. So far I appear to be right. That doesn’t mean the EMH is precisely true (it’s not), but I’m having more and more trouble finding any useful anti-EMH models for investors."
So to disprove RE what would Buffett have to do-outperform every single year? Seems like a rather stacked deck. He says that RE could only be approximately true not precisely so or there'd be no incentive to estimate fundamentals. However, if the odds are this long of beating the market where is the incentive? Is it really no different than buying a lottery ticket? I don't buy that.
No comments:
Post a Comment