RE: vladiator asked, "are you saying that some self-trained college dropout or a 50 year old sit at home mom who saw an E-trade commercial and decided to trade is capable of finding really profitable niches that Goldman and others aren't able to find???" No, that is why the joke is on everyone. That some traders make so much money in the markets some of the time should not be construed as evidence that everyone can get rich in the markets all of the time.
Part of the problem is that most people have no clue what it takes to find and exploit the evolving pattern of inefficiencies in the markets. They see the markets as "free" money just lying around. They see a stock go up 10% one day and imagine that they could have picked it that morning and made a bundle. In contrast, very few people who watch the Olympics think "That's easy -- I could of won that gold medal." Its blatantly obvious that Olympic athletes require massive amounts of skill, stamina, and strength. Its not obvious that trading requires anything special (Hey, even Hillary Clinton made a bundle in the futures market, right?).
I suspect that we agree that it would be better for most people to believe in EMH, even if it is not exactly true. It's a separate, and thornier issue as to whether university professors should teach "the truth" vs. teaching falsehoods that encourage behavior that leads to greater personal and societal good.
RE: vladiator said, "although I don't think it's necessary for efficiency to have all investors as profit/utility maximizers." I disagree. I do think that uniformity of the utility function of investors is a prerequisite for true market efficiency. At issue is the difference between a utility-efficient market and a price-efficient market. If all market participants have the same utility function, then they will indeed remove all the inefficiencies with respect to that utility function. In such as situation, no one can create additional market beating utility. But in a utility-efficient market, there will be trading actions that have zero or negative utility, but positive risk-adjusted profit expectation (or positive utility with respect to a different utility function). A diversity of stable utility functions implies a diversity of stable inefficiencies -- the magnitude of the inefficiencies being proportional to the capital wielded by adherents of each utility function and the pair-wise overlap of the utility functions.
RE: vladiator said, "One of my co-authors presented one of our papers at Goldman last year. It showed very robust evidence of big returns on a number of strategies. They didn't care beyond a few comments b/c it wasn't scalable enough for them..." See, this is exactly my point. Goldman's utility function does not equal my utility function. The result is that the market may be "efficient" to Goldman, even in the presence of blatant inefficiencies. There are pockets of inefficiencies in the market that are big enough for a smart smaller trader.
My point: Inefficiency is in the eye of the beholder.
RE: central command economies: BTW, that Goldman considered some inefficiencies beneath its threshold is further evidence of the inferiority of central command economies. Big organizations have a predilection for focusing on big problems. They become incapable of dealing with or solving the many small problems that occur in real economies. They also have an arrogance to them, tending to lock on to a single "big" solution as "the plan."
The power of capitalism is that some of its much maligned inefficiency comes from the creation of new solutions on a smaller scale. Some of this wasted competitive effort turns out to be the correct solution for an unknown and unknowable future. The bureaucracies of command economies tend to squash this type of small-scale creativity because they believe that the center knows best and that uniform execution of the plan is "more efficient" than allowing different people to try different alternatives. If the center's plan is correct, then everything works out for the best. Unfortunately, the single central plan is too often wrong. Worse, this unpleasant reality is compounded by inertia and dogma that create tall barriers to correcting the oft erroneous central plan.
Cheers, vladiator,
Traden4Alpha
), had VERY good information as to the costs of producing yogurt all over the country. He also had a good idea of what margin was fair and needs to be earned so that the products would be in demand and goods would be supplied. Some products would subsidize others etc. The gains were shared relatively equaly by society - whether in the form of lower prices, or the benefits that the profits earned were used to create.
It was a confluence of historic events, poor execution, and exogeneous influences from outside the country.