Seems that everybody and his Aunt Maude are declaring the Efficient Capital Market Hypothesis to be dead, at least for the time being--another one of many casualties of the late meltdown. I think the conventional wisdom is probably right on this one (wisdom of crowds, again!) although I'm not sure I've seen anybody do a satisfactory job of explaining just exactly what it is that is dead, and/or what it is dead about it.
Let me offer this chicken-scratch first draft.
First, as to what is ECMH: there is a lot of loose talk out there about how "we" used to believe that "markets" were "right" (i.e., and guess what--markets are not always right).
I think this is a vast, crude, even a grotesque, oversimplification. Say rather: the market "impounds" at any given time any information that may influence a market price. This is a much narrower claim, armored up with any number of potential qualifications that may limit its falsifiability. In particular, as cast here it makes no important claim to "rightness" at all(contrast, e.g., the trivial claim that the claim itself is "right"). Rather, it is entirely consistent with the claim that the market is vastly, crudely, grotesquely wrong about the future--adding that it will change its mind when it knows better.
Taken at least as a counsel of prudence, I think this take on ECMH is a vastly important insight. It is a reminder, first, that all the charlatanism of the ragtag army of seers, hucksters and assorted conmen who tell you that you can out think the market--all these are worth nothing more than the gas they exhale.
Some will say this is axiomatically self-evident, but it is amazing how often the point is lost on my students. Quite a goodly number--indeed, of those who have given any thought to the matter, almost all--show up serene in their assurance that they are able to beat the market or (what comes close to the same thing) that they will be after undertaking the relatively modest effort necessary to compete my course. I'm not at all clear from whence this cheery optimism arises; my best guess is that it has something to do withe their past in what Dierdre McCloskey calls the benign Christian socialism of the American family: the conviction that the world is a well-governed place calibrated to confer bounties upon them, and that it will continue to do so.
I have always regarded as my post important public function to knock the stuffing out of this belief and to convince them that there is nothing, absolutely nothing,that can guarantee them wealth except a large inheritance, unexampled good luck and, oh yes, perhaps diligent and relentless hard work. I should add that in this, as in most other endeavors, I am rarely successful.
But there is another way of looking at ECMH in which it appears as not so anodyne. That is: even if ECMH makes no claim that the market is "always right"--still the question remains: how could it be so spectacularly crashingly catastrophically wrong? It's one thing to tell us we are all sheep chewing on the same stubble. Why couldn't it have warned us that we are all lemmings charging off the same cliff?
I suppose the proponents of ECMH would say--well, never said you weren't lemmings. We only said you couldn't find it in the data. True enough, perhaps, but lame and evasive, in the manner of "no controlling legal authority." Somebody--Paul Kedrosky?--has remarked that ECMH seems to be interesting only when it is of no use. More or less on the order of Kafka's Messiah, who will come only when he is no longer necessary.
It's talk like this, of course, which brings us to the next round--the attempt to identify and anticipate lemming-like behavior. It's sending the theorists back to their (uncut) copies of Hyman Minsky. It's pushing this book up to #296 on the Amazon chart. It's motivating a large body of literature whose main theme seems to be--oh, we forgot to tell you, folks.... Whether anyone will succeed in locking this particular barn now that this particular horse is stolen is a quesetion that remains to be answered. Meanwhile ECMH is down there at the end of the bar, looking lonely and a little shopworn and frazzled, but alive and just as true as it was all along. Which is to say, sadly, not true enough.
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