Ben Southwood recently directed me to an interesting post by Sam Atis:
In the post, Sam Atis suggested that the basic idea behind the Efficient Markets Hypothesis could also be applied to other areas of life. Here’s one of his examples:
Thinking about which charities to donate to is long and difficult, and I’m probably not smart enough to do it properly anyway. But GiveWell does a load of research, so I should just donate to whatever charities they recommend as the most effective.
I find that the more efficient the market, the less time I need to spend on annoying tasks like information gathering. For instance, while the grocery store market is not perfectly competitive, it is efficient enough that I don’t bother doing price comparisons. I rush through the store grabbing what looks good, assuming that if the price of an item were wildly out of line then the store would not find willing consumers for the good. In a sense, I free ride off the people that do check prices more carefully. Every so often I get “ripped off”, but I’m willing to pay that price in order to save valuable time.
Cyber Monday provides another good example. When I don’t know much about a product that I’m purchasing online, I often opt for the most popular version. The fact that one company’s product greatly outsells its competitors does not necessarily mean it’s better, but popularity is certainly one valuable piece of information, especially when combined with the online ratings.
The development of the internet hasn’t just provided consumer ratings, it has also improved the quality of consumer goods. Some small towns that are outside of major metro areas have high quality restaurants that would not be able to survive without the internet. In the past, on road trips we used to stop at the least bad chain restaurant near a freeway exit. Now we search the internet for the highly rated Vietnamese place that might be a few blocks further from the highway. Producing high quality is expensive, and firms can only recoup the costs of doing so if consumers have the information necessary to make informed choices.
Even in cases where market efficiency falls short of the theoretical ideal, a market may be efficient enough to offer major benefits to consumers that wish to avoid time intensive search costs. The EMH has never been literally true; it has always been an approximation of reality. Over time, however, more and more product markets are becoming increasingly like the relatively efficient financial markets.