<story><title>Crunching 200 years of stock, bond, currency and commodity data</title><url>https://www.bloomberg.com/opinion/articles/2019-02-07/eternal-market-patience-offers-eternal-rewards</url></story><parent_chain><item><author>soared</author><text>&amp;gt; the market is not as efficient as it is supposed to be&lt;p&gt;I have a recent business degree, but not finance or econ. In school we were strictly taught the market is efficient and I fully believed that. But I&amp;#x27;ve seen online and discussed in person a (seemingly) growing idea that markets are not in fact efficient at all.&lt;p&gt;Are there any economists&amp;#x2F;finance people that can shed light on this? Are these new ideas gaining traction, or old ideas just sticking around?</text></item></parent_chain><comment><author>prewett</author><text>Check out the book &amp;quot;How Markets Fail&amp;quot; for a discussion on how the efficient market hypothesis gained popularity (part 1) and a discussion of the many ways that real markets do not maintain the preconditions for markets to be efficient.&lt;p&gt;In particular, the precondition that Adam Smith stated was that increasing production required linearly increased costs.  However, this is frequently not the case (utilities, railroads, software, social media networks, etc.).  Also, markets require a certain minimum number of producers (and consumers) in order to remain efficient.  Consolidation can reduce the number of producers below the level that meets the precondition of efficiency, and then barriers to entry to prevent newcomers from joining the market.&lt;p&gt;As far as efficient market theory applied to the stock market, I&amp;#x27;ve always thought that efficient market theory was trivially disprovable:  did all companies in the US lose 20% of their value all at the same time this past Nov - Dec, in the same season that they are selling all their inventory during the holiday season?  And then regain 10% of it all at the same time the next month?  Did Apple lose 50% of its value from between July and December, despite the fact that its revenues, costs, dividends, assets, people-capital, know-how, brand, consumer sentiment, etc. remained roughly the same?  Compare to, say, PG&amp;amp;E during the same period.</text></comment>
<story><title>Crunching 200 years of stock, bond, currency and commodity data</title><url>https://www.bloomberg.com/opinion/articles/2019-02-07/eternal-market-patience-offers-eternal-rewards</url></story><parent_chain><item><author>soared</author><text>&amp;gt; the market is not as efficient as it is supposed to be&lt;p&gt;I have a recent business degree, but not finance or econ. In school we were strictly taught the market is efficient and I fully believed that. But I&amp;#x27;ve seen online and discussed in person a (seemingly) growing idea that markets are not in fact efficient at all.&lt;p&gt;Are there any economists&amp;#x2F;finance people that can shed light on this? Are these new ideas gaining traction, or old ideas just sticking around?</text></item></parent_chain><comment><author>chollida1</author><text>I think there are a few good responses to the question of &amp;quot;are markets efficient?&amp;quot;.&lt;p&gt;1) Markets are efficient enough in that you generally don&amp;#x27;t see any real big arbitrage opportunities.  Small ones will always be present, and as is often pointed out its not worth the big players time to search them out and capitalize.&lt;p&gt;A trader also sees this as evidenced by the fact that we are using more and more data and ever increasingly complicated math to eek out smaller and smaller chunks of alpha.&lt;p&gt;2)  different people have different ideas as to what the correct price actually is.&lt;p&gt;Consider a company that is continually losing money.&lt;p&gt;- Fundamental analysts will value this as a poor company due to its future cash flows dwindling.  They may consider this a short opportunity&lt;p&gt;- Merger Arb folks may bid up this up as a potential merger target thus raising the price.&lt;p&gt;- ETF&amp;#x27;s tracking an index just don&amp;#x27;t care, they&amp;#x27;ll buy the company in proportion to its index weight.&lt;p&gt;- Stat arb folks will be agnostic to price and only compare it to a peer that they feel it will trade in relation ship with, these people will be both long and short this company at different times, often unrelated to what its price currently is.&lt;p&gt;3)  Physics often uses the simplifying assumption of no friction to make things easier. The efficient market hypothesis works under the assumption that everyone knows about news immediately and has time to react.  Some investors react in micro seconds, some in weeks. Both affect the price</text></comment>