Efficient market theory; Total junk still being taught to people?

Quote from jem:

vlad... While you seemed to have made a case for socialism/soviet systems there were economists in Wash. D.C. a few years before the collapse of the USSR that briefed congress with thick books detailing and I mean detailing how completely inefficient the soviet command economy was. ( I know I ended the sentence improperly)

I had a professor who put out parts of and edited 300 - 500 pages of documents for Congress on this subject every year. He was smart a guy and in the papers he was allowed to pass out to the class he predicted exactly what was going to happen and how it would happen. It was one of the most amazing experiences I ever had--- watching what this guy said would happen, happen. You can not argue that any aspect of their economy was efficient from what I read. They had resources all spread out-- people in one place, food in another, minerals in another, and they could not command that economy to work.

For background I graduated from George Washing Univ in 1986, in case you want to look my professor's work up. By the way aren't you a little concerned that while professors get to pursue knowledge ( perhaps an underpaid career) they expect others to work for a government wage so things are more equitable.

Now for EMH- If you trade large enough amounts you can't do better than the market. No kidding.

I have been fascinated by this EMH thought for years as it was beaten into me by my socialist econ professors in the early eighties. You must admit what you are professing now is significantly different from what my professors were stating then.

Also, what I rarely see is how people account for the following: X percent of institutions underperform the market and probably an even higher percentage of individuals underperform the market. The market is not efficient it is actually more difficult than efficient or random. When people start to understand this fact they can start to make a living via trading. The pit and the others making markets are living adapting mechanisms by their nature forced to destroy repetitive non adapting systematic exploitation of the market.

On a side note I refer to an article by an academic who works for the Fed. She was interviewed in Stocks and Commodities magazine about a year ago. She used what she called boot strapped statistics and stated rather clearly that the currency market was not efficient because it reacted differently to different price levels relative to how the market was quoted. I.E. you would find price bounces that were outside random occurrences when you looked at round numbers based on say the normal market quotation of dollar yen but you would not see the same kind of actions around the same number for yen dollar. The article fairly convincingly questioned the merit of any kind of emh theory.
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What your professor was discussing were the later years of the USSRs era. That's when the execution of the system really got screwed up by those in charge. I was lucky to live before and after that stage and can assure you that before the perestroika ideas (very good in themselves) things were much better. The system worked better b/c it was more stable. The temporary instability got things out of wack. Criminal elements go to power. The rest is history. It is NOT that the west destroyed the USSR. :D It was really just a very unlucky confluence of events. Just as it was a very LUCKY confluence of events that things were initially set up so well in the US with the constitution etc and that no event got the system out of it's stable course by enough. Had that happened, I'm not sure how viable it would have turned out. The reason it is even higher to beat the market that what would be under EMH is b/c of the transactions costs. For long term traders the performance is much closer to EMH predictions.
The last example you are giving is a good one as it sheds light on another thing I don't think I mentioned before. It's not the true randomness that EMH implies. It's the fact that you can make a fortune on the instances of nonrandomness you spot. Many of those will only be evident in retrospect and if there is something you can predict in advance, your own actions will make it vanish.
 
Quote from daniel_m:



as i said, you're always good for a laugh.

i'm sure you could write a book defending their actions...
most traders would just call it for what it really is - crap trading
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How freaking come when I try to be polite someone like you comes in and starts thowing around insults and smirks. The when I fire back, all people see is my last post and blame me for "being so defensive". If you understood at least an iota what what the brainy guys at LTCM were doing (very successfully by the way), you would see my point. Just because they didn't unticipate everyone else to be so dumb that it would take them so long to figure out they were wrong doesn't mean they don't deserve respect from those who have IQ's lower by a factor of ten.
 
Quote from vladiator:


What your professor was discussing were the later years of the USSRs era. That's when the execution of the system really got screwed up by those in charge. I was lucky to live before and after that stage and can assure you that before the perestroika ideas (very good in themselves) things were much better.
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can we take ANYTHING you say seriously? you were lucky enough to live BEFORE it started going haywire? since you were born in 75 or 76 i find it kinda hard to believe... as by the time you were old enough to even begin to understand what was taking place it was all over..

i was living in socialist yugoslavia at the same time... things were pretty great as far as a kid was concerned... yet for the rest of the population.. wel...
 
Quote from Babak:

jem,

Now what I still don't understand is if it has been proven that no group of smart people with scads of info can set the price of potatoes....then how in the world can a bunch of old men pretend to know what they are doing when they set the price of money?
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???? it has been proven???
Come on. Yes, they can. with enough info they know the supply and demand, how hard it is to see the price???
 
i really couldn't give two shits what the ltcm boys were TYRING to do... the point is they FUCKED UP.. and that, my friend, is by FAR the most important point..

iq10? try 140 buddy.. and believe me, when it comes to making something of your life, or doing well as a trader, it doesn't mean shit...

and don't get so worked up.. what i said was hardly an insult to YOU (unless you have some stake in LTCM's reputation)...
 
Quote from vladiator:



???? it has been proven???
Come on. Yes, they can. with enough info they know the supply and demand, how hard it is to see the price???
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oh of course.. works like a charm. i mean, it's just SO SIMPLE....


:)
 
Quote from jbtrader23:


But the key flaw in the arguement is assuming all information is equal and will be seen by everyone the same way. I mentioned that in the first post. You could give market participants a way to beat the market by looking at historical action (i.e. buying during major panics...using sentiment indicators to gauge it and sell during euphoria). Buying when a bear market makes the cover of Time or NewsWeek for example. Selling when everyone and their brother is talking about stocks. To think that buying during panics and selling during euphoria is of no value to the average investor is a joke. Or using more complicated technical ways of making money. The bottom line is that people may be aware of these ways of making money, but they don't stick to the plan!! Most TA oriented traders can tell you that. You can have a great profitable methodology, but how many actually follow it exactly, each and every day? Ahhhhh. The EMT guys assume investors are almost like robots. They will automatically use successful methods to make money. Some methods do fail (The January effect, Dogs of the DOW). But people use their own judgement when looking at methods. If a method does get popular enough, it's profitability will shrink over time. Supply and Demand catch up to each other.

Another thing I objected to was instantly categorizing all TA as nonsense. Unless they've tested each method, I don't know how they can make such broad generalizations (and there are almost an infinite number of rules with TA that you can use to make money). Just because alot of people fail with TA, doesn't mean TA isn't useful. Hell, 90% of people fail in regular business. People successful in regular business aren't just lucky. Hard work, dedication, determination, a good bankroll, good money management, keeping your emotions in check,.....well what do you know, those qualities make a great trader as well. If you read books like the Market Wizards, I have a hard time believing they are all lucky.

The Efficient market guys are smart. I don't doubt that. But I just don't see why they keep teaching it.
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I replied to your first post - it is NOT necessary for every one to interpret the information the same way. Buying during panics, selling during euphorias... Sure, that sounds like a great and a very profitable rule when you look back on the chart and identify those points in time. ....they seem so evident... Go back a couple of years and try predicting the top. Or try predicting the bottom now... Two years from now, the bottom will probably be obvious and there will be dozens of "wizards" with their "I told you so's" just as they would be dozens of them had it gone the other way.
It can't help but laugh at how they switch the "wizards" and pros on MSNBC depending on what happens. market opens higher - sure, they have this guy retrospectively explaining how it all makes perfect sense and how you could probably see this up day in advance. Guess what, for a totally weird reason it starts to plummet and ends lower. Well, they find a bunch of other wizards now explaining how it all related to this and that. The truth is they don't have a fucking clue what will happen next. And explaining what just happened is of no value really. Maybe it was the profit taking, maybe someone knows smth etc.
PS by the way, the dogs of the dow is a joke. It was a statistical artifact. I can't believe people still buy that.
The thing is, EMH doesn't really have that many assumptions you keep trying to refer to. It has one major and a very reasonable assumption - if there is a good arb opportunity, if it is big and juicy, someone will very quickly take care of it and it will disappear. No randomness, equal interpretation of news etc is necessary.
 
Quote from buzzy2:


C'mon let's be realist let's not glorify the academic lifestyle. They are paid to sit everyday through seminars so boring they would drive me to suicide. They play their vicious politics for what? for getting and office here and not there? to get a position in committee X and not Y? Normal people don't care about those things... Also they give themselves importance because their name appear in BS journals? All this while doing "science" so pathetic they make true scientists cry... and while kissing rich guys' behinds to get their precious puppet positions in company boards and fund brochures.. to get consulting/litigation little jobs... or just good old cash they call "endowed professorships", "university endowment" etc etc.
Sorry but my main objective in life is freedom of other people's BS. Also I have a physiological flaw: my head hurts when I listen to BS, that's why I never could be an academic. And.. to get the free lifestyle I want I don't need a gazillion dollars, just a few million... anything else is just icing on the cake. In the great scheme of things I am nothing, that's true. But... is anybody?
Oh yeah I remember since Marx economists think they are the driving forces in history... right...
Also it is laughable how economists think they are geniuses with their formula-ridden papers, but first) most of the mathematical stuff in economics is just copy from physics and math stuff, and second) like darkhorse said they work with flawed premises and approches, so no amount of "mathematical" lipstick is gonna make this pig look good.
And finally you ridicule daytraders with their "one indicator T/A". You have no idea of the sophisticated math and software some short term traders are using to extract money from the market... That's why economists are the most ignorant of the lot... because they think they know everything.
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Man, you have no idea how wrong you are. I just came back from one of those seminars and you have no freaking idea about how stimulating it was. Yes, to some myopic (usually old) professors what you describe might apply well. That does not mean it has to be true on average. Most of professors at my school are either very young productive rookies (very stimulating research environment) or very famous and smart and reputed older guys. The prof at the community college you attended my have been the way you described. You get what you pay for.
The professors at my school are cheif witnesses at major US wide litigations, have REAL consulting jobs etc etc and I know of a few that drive very nice jaguars :D
My head also hurts when I listen to BS, that's why I will not dignify your crappy anti-academic/anti-econ/finance remarks with any further response.
They may not know everything, but I assure you, just by virtue of their position they DO know more than you. That does deserve respect, moron. Just b/c you have read a few TA books (if those indicators worked, would would write about them????-hence their value), doesn't mean you know crap.
Keep trading dude. The more of those like you (recent BS grads turned "sophisticated TA-based traders", the better for me. I trade at exactly the points where the majority of those trading against me are like you. Works very good so far.
 
Quote from DT-waw:

First of all, look at Efficient Market's conditions:
1] infinite number of traders
2] single trader's orders don't have any influence on price (so, the market has infinite volume)
3] every trader has the same investment time horizon, risk tolerance
4] there are no transaction and news costs
5] every trader sees the same information in the same time and reacts to the news in the same way

These conditions cannot be met in the real world. Yes, it is just a "Theory" and nothing more :D
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You must have dug those either out of a very old book or a very simplistic one. As I mentioned in my recent post, there is ultimately only one assumption, if money is to be made it will be very soon and they won't be any left :D. All of the assumptions you list are just there to derive and elegant model, they can be relaxed. Look at Grossman and Stiglitz for an example.
 
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