Randomthoughts Response to John Carney’s Article on EMH

By on June 22, 2009

One of the better comments made this year to an article on investing:

randomthoughts said:
Jun. 21, 12:12 PM

The belief that the market is efficient as a pricing mechanism for assets – that is, the idea that asset prices rationally reflect all available information – is horseshit.

Bubbles and busts occur because there will always be a lot of “dumb money” in the market, and because the “smart money” managers are evaluated and compensated on a short-term basis and thus must take into account what the “dumb money” will do (in addition to information about fundamentals).

In general, very few people actually behave in accordance to some theory they espouse – any theory. Rather, they respond to incentives: they will happily mark assets to market on the way up (to maximize their bonuses) and vigorously lobby against mark to market on the way down (to avoid losing their jobs).

SMA Comment: Randomthoughts knows what’s going on.



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