Re: Markets are, most likely, not efficient

On 13 May 2013 20:51, Manu Sporny <msporny@digitalbazaar.com> wrote:

> This is a really interesting paper that throws a bit of a bombshell into
> the old "markets are efficient" argument. It combines economic theory
> and computational/information theory (excerpt w/ my additions in[]):
>
> Perhaps the most famous question in the field of finance is: “Is the
> market efficient?”
>
> Perhaps the most famous question in the field of computer science is:
> “Does P = NP?” [Do all questions that have an answer that can be
> verified quickly also have a way of answering the question quickly].
>
> The result of this paper is that these two questions are linked, and
> furthermore, the answers to the two questions must be the same: markets
> are efficient if and only if P = NP.
>
> [The paper goes on to state that most economists (80%+) believe that P =
> NP (markets are efficient), whereas most computer scientists (92%+)
> believe that P != NP (markets are not efficient)]
>
> Download link for the paper can be found here:
>
> http://arxiv.org/format/1002.2284v2
>

Thanks for sharing.  The vast majority of markets are NOT efficient,
because they are expected to predict a timeline that is infeasible to
estimate accurately.

I think Shiller debunked this whole thing in his classic work, "Irrational
Exuberance".

The only markets I know of that come close to being efficient are short
term gambling prediction markets.

As soon as any instrument has a multi year time frame, price discovery is
simply a reflection of buyers meeting sellers

Furthermore there's Matt Tiabi's piece, "Everything is rigged"

http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

This is something more people on wall street turn a blind eye to, but it's
slowly creeping into the pubic consciousness

Then we need to think about risk hiding and black swans.  Humans are
psychologically designed to be 'fooled by randomness' ... inevitably this
creeps its way into valuations by virtue of moral hazard.  Consider that
the entire profits of banking corporations are due to implicit gov
subsidies see:

http://www.youtube.com/watch?v=F5Q5-jfkbxk

Dr. Bernanke shows this is more than just an academic issue.  Hopefully
technology can make things more efficient! :)


>
> -- manu
>
> --
> Manu Sporny (skype: msporny, twitter: manusporny, G+: +Manu Sporny)
> Founder/CEO - Digital Bazaar, Inc.
> blog: Meritora - Web payments commercial launch
> http://blog.meritora.com/launch/
>
>