Bob Murphy on EMH
By David Henderson
Ever since I was an assistant professor at the University of Rochester’s B-school (now called the Simon School) in the late 1970s, I have believed in the Efficient Markets Hypothesis. The basic idea is that market prices reflect all available information. See this article in the Encyclopedia for a fairly up-to-date statement of the issues and the evidence. But I think that at some point I started to hold the EMH as an article of faith rather than as something that could be wrong.
In a recent article, economist Bob Murphy takes on three defenders of EMH. It’s well worth reading. A couple of highlights:
On Bob Lucas’s defense:
Lucas’s arguments here are typical in this debate. He offers a seductive mixture of assertion and non sequitur to make his case. First, the EMH is itself under dispute, so it hardly helps to cite the EMH and its implications. (This is akin to a Christian quoting the Bible to an atheist to prove the authority of Scripture.)
Now, in what sense has it “been known for more than 40 years” that it’s impossible to predict sudden falls in asset values? Didn’t Mark Thornton and others warn us that the housing bubble was too good to be true several years before the crash? What more could an Austrian cynic do to disprove the EMH, than to predict that “the market” was all wrong when it came to housing prices, risk premiums, and so forth? Investors who heeded the warnings of Thornton and others got out of the stock market, didn’t buy houses to flip in 2005, and, otherwise, managed to outperform other people who were caught up in the euphoric boom. If that’s not “beating the market,” what is?
Quoting Bill Easterly’s defense:
[E]conomists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned efficient-markets hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market.
and then commenting:
Now c’mon — that’s just plain funny.