“Robert Lucas… developed the Rational Expectations Hypothesis, which became dogma across all of the western world’s economic departments between roughly 1965–70 and 1985–90. Simply put, what it specifies is that at all times, all market participants know… all relevant information… Second, at all times, all market participants share one model of how that information will translate into price changes, economic behavior, etc. And third, that that model is truth.”
– Bill Janeway Future in Review 2005
Also see Bill Janeway’s cradle-to-grave approach to venture investing.
hehe. Me and a mate of mine (who is now doing a doctorate at LSE in finance)used to join the usual b-school chorus and argue about market efficiency untill the cows came home.
I don’t do it anymore, partly because I’m over it, but also because of an interesting observation I saw in this book a long time ago. (I think it was called “Mathematician Plays the Stock Market”).
Anyways, the cool thing with efficiency is to do with collective bias. If everyone assumes the market is efficient, then no one tries to use the information and the market becomes inefficient. Likewise, if most people think the market is inefficient, then people hunt for profits and the market turns efficient. Voila!
Of course, in the real world we get a strange mixture: some people will think the market is efficient, other think it isn’t, we don’t know what the prevailing majority is at anytime, it’s probably 50:50, which is why we can’t ever tell what the true state of the market is. Basically, market efficiency and inefficiency come and go in waves.
So yeah…why the “hehe”… declaring “Markets Ain’t Efficient” is the same as saying “Markets are efficient”.
P.S. Personally, I think this debate is done to death. Trying to profit from something no one else knows about is sooooooo boring that people just need to get over it.
The more interesting thing I find is to do with valuations, and particularly, deliberate underpricing. The operative word being: deliberate.