False beliefs and the efficient market

Thank you for posting this. Rosenberg does indeed do a superb job.

I have just finished reading your wonderful book, The Myth of Rational Markets. It was a revelation on many levels because I was one of nine African Americans in the 1978 class at the University of Chicago Business School. Roger Ibbotson was my Finance professor. Unfortunately, I was in way over my head, having arrived at the school with just a quantitative background yet had never owned a stock in my entire life. I passed the class on pure intellectual sweat alone. Being much older now, your book filled in a lot of blanks about what was going on around me at the time, so thank you very much.

As I was reading your book and wrestling with the concept of the efficient market hypothesis it was hard to keep clear exactly what Gene Fama was and was not saying. I still think there is some of that in this discussion.

So here is a different angle coming from quantum physics (my book The Art of Quantum Planning, provides more detail). The Heisenberg Uncertainty Principle argues that one cannot simultaneously know both the speed and position of an electron. It also argues that the observer has an influence on both when measuring either speed or position. Thus the observer plays a role in determining what exists.

Taking this to efficient markets thus opens a few important questions and leads to one conclusion. The questions are from what point of view and with what information is a market participant observing a stock he/she may be trying to price? If we sum all of the market participants together across all those points of view then at that instant the price that results is the corrrect price. The market is efficient instant to instant.

Since the position of the observer is always a key factor (and is never "neutral") there can never be a "true" price. In short there is no "true" or instrinsic price that efficient markets are charged with setting. The price must change instant to instant because the real world information that might impact the price changes instant to instant. The desire for a "true" price is a human desire that is impossible to achieve and will always be relative and dependent on the observer. In light of this all predictions are also relative.

I'm a fan of it. He said pretty much the same thing I did, except all smarty-like.

Also, I've started posting on my website again, You might or might not like the current piece thats up - it provides an alternative theory on the causes of the size of the financial industry and reasons for the collapse.

"The big universal assumption made here is that markets are not rational. At least not all the time. This is demonstrated by the transitive property. Markets are made up of people. People do not behave rationally all the time. Therefore, markets are not always rational."

quote linky:

http://www.124monkeys.com/business/2008/11/the-capitalistic-case-for-socializing-industries/#more-146