Monday, February 06, 2012

Just How Efficient Is The Market? - Seeking Alpha

Just How Efficient Is The Market? - Seeking Alpha:

The debate on whether Markets are efficient or not is seemingly never ending and in the end a debate no longer of absolutes ("it is" or "it is not") but one of degree ("not perfect but good" vs "not even close").

Seeking Alpha's Stockopedia lays out the case for the latter (Markets are not even close to efficient) but first attacking the assumptions (low hanging fruit?) and then showing some studies that show the view that market perfection is not the norm and that due to structural and behavioral factors the small investor may be better able to beat the market than the large institutional investor.

a couple of "look-ins"

Firstly, EMH is based on a set of absurd assumptions about the behaviour of market participants that goes something like this:
  1. Investors can trade stocks freely in any size, with no transaction costs;
  2. Everyone has access to the same information;
  3. Investors always behave rationally;
  4. All investors share the same goals and the same understanding of intrinsic value.
All of these assumptions are clearly nonsensical the more you think about them but, in particular, studies in behavioural finance initiated by Kahneman, Tversky and Thaler has shown that the premise of shared investor rationality is a seriously flawed and misleading one."
and :

"The reason that EMH theory has caught on despite its clearly absurd underlying assumptions is that it explains away something rather awkward - the persistent failure for the average fund manager to beat the market. But there is also another explanation for this woeful track record by fund managers, namely incompetence, coupled with the institutional imperative aka. herd behaviour. The vast size of many funds, the uncertainty of the timing of investment inflows and outflows, the fees/commission they charge and other factors discussed here also mean that institutional managers can be at a huge disadvantage to a motivated share-owner with less capital."

H/T Jordan a former student

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