Sunday, July 19, 2009

Two ECMHs: What Thaler Said

The Economist's postmortem on the place of academic economics in the late uproar is crisp and intelligent, not least for this account of Richard Thaler, expressing a point I've tried to make here before (link, link):
The [Efficient Capital Market] hypothesis has two parts, he says: the “no-free-lunch part and the price-is-right part, and if anything the first part has been strengthened as we have learned that some investment strategies are riskier than they look and it really is difficult to beat the market.” The idea that the market price is the right price, however, has been badly dented.
Afterthought: I'm sure that Thaler has long since noticed that his craft-appropriate surname is the root of the word "dollar."


Anonymous said...

There's no such thing as a "right" price. The market price is just the natural price when you allow all kinds of behavior except stealing.

Anonymous said...

Actually, including stealing (since one has to pay for law enforcement of some kind to prevent it).

Anonymous said...

The market was never supposed to pick "right" prices, just to reward good decisions and punish bad ones. If everyone (or at least the people with the most influence on the market as a whole, i.e. investors) makes bad decisions, the market, left to its own devices, has no qualms with punishing everyone.