A quip and some questions

Curtiss Leung bofftagstumper at yahoo.com
Thu Apr 13 08:36:08 PDT 2000

Doug, clarifying something I (egregiously) misunderstood in his book regarding 'efficient' financial markets, wrote:

>> They're efficient in the sense of incorporating all

>> available information (almost) instantaneously,
>> which is practically a tautology. But the financial

>> economist's sense of "efficient" has little to do
>> with an ecologist's, engineer's, or anyone else's.

to which Daniel quipped:

> Financial markets are much better than that -- they
> incorporate all the existing information, plus a bit

> more.

<brittle attempt at wit>

Is exuberance, rational or not, information?

</brittle attempt at wit>

<serious, but likely woefully uninformed questions>

Doug, how do the defenders of 'efficient' markets respond to the following (if they even bother to):

1. What counts as information? If I'm stock market investor, I can make choices according to the fundamentals of a stock or the so-called "technical" analyses. Even if I grant that markets are efficient in the sense its defenders give (and that the definition they give isn't a tautology but has some real meaning), that means the current stock prince at any given time takes into account both of these models of valuation. But these two models can yield contradictory results, and from a contradiction, anything follows. So it seems to me that the defenders of the faith must either stipulate a single correct method for valuing securities, or admit that the amounts of "noise" in the information the market processes can be so high that the legitimate price of a security could be anything.

2. Obviously it takes time for information to propagate and for people to make their trades, and I suppose this lag accounts for temporary "inefficiencies." But has any orthodox capitalist theorist stipulated those times or conditions at which the market has incorporated all the information and the market price of a security has reached its correct price? If any have, I suppose there's a good amount of controversy about what those times and conditions are, so at least they're trying. But if they *haven't* -- well, what's the excuse?

</serious, but likely woefully uninformed questions>

Thanks, -- Curtiss

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