A quip and some questions

Doug Henwood dhenwood at panix.com
Thu Apr 13 09:18:48 PDT 2000

Curtiss Leung wrote:

>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.

As they say, efficient market theory has a dual hypothesis problem: the speed by which info is incorporated in prices, and the quality of that information. It's hard to argue against the first part - most markets react almost instantaneously to news. The second is another story - that's where irrationality and exuberance come in.

>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?

To a market fundamentalist, the latest price is the "correct" price, since it by definition incorporates all available information, and there's no omniscient observer who knows better.


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