

Can we please stop saying the market is efficient? - olefoo
http://blogs.harvardbusiness.org/vermeulen/2009/06/can-we-please-stop-saying-the.html

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voisine
I don't buy it. The example of ISO9000 for instance. Customers value it
because it's cheaper and easier than researching a companie's business
practices to see if they're stable and predictably repeatable. When it sucks
innovation out of a company long term, that company gradually loses business
and control of capital until it goes under. The market effeciently reallocates
resources to those who provide the greatest value for least amount of consumed
resources. Of course it's not efficient at keeping every company alive and
healthy, no matter how wasteful and worthless its products.

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smakz
Was anyone else confused by this article? I assumed he was going to be talking
about the efficient market hypothesis

<http://en.wikipedia.org/wiki/Efficient_market_theory>

Anyway, this seems an uncharacteristically juvenile HBR article. Of course
businesses are not 100% efficient, they are run by humans after all. But firms
which are more efficient then others have lower operating costs, better R&D,
higher margins, more innovation, etc. - these are the competitive advantage
that 'efficient' firms use to get the edge on competitors. That's not to say
that each one doesn't do something to make you as an investor go crazy.

~~~
lionhearted
> Anyway, this seems an uncharacteristically juvenile HBR article. Of course
> businesses are not 100% efficient, they are run by humans after all. But
> firms which are more efficient then others have lower operating costs,
> better R&D, higher margins, more innovation, etc. - these are the
> competitive advantage that 'efficient' firms use to get the edge on
> competitors. That's not to say that each one doesn't do something to make
> you as an investor go crazy.

Cut him some slack, from his bio he looks like a pure academic who hasn't done
business. They all have lofty ideas about how easy and organized business
should be, as opposed to a gritty, murky, sorting-it-out type thing.

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russell
Yes we should. Vermeulen says the idea of Darwinian economic competition is
wrong. Even Darwin wouldnt buy it. He gives examples of why the flu doesnt
kill everyone and why ISO9000 in the long run saps the vitality out of a
company. Hey, look at Motorola.

I think the whole idea of market efficiency came about because economics
wanted to be a science, and everyone simplified their models to the the point
that they were understandable, except that they were all wrong. First perfect
efficiency requires perfect information. With the internet we are getting the
first hints of perfect information, and we are being overwhelmed. Adam Smith
certainly didnt have it. Second all decisions are to some degree irrational,
based on taste, beliefs, friendships, bribes, etc. Kahneman got a Nobel prize
in 2002 for that insight. (This is the same group the gave Merton and Scholes
a prize for the derivatives pricing model that brought down the universe.) If
all decisions were completely rational, we would all be programming Python.
;-)

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gaius
There was nothing wrong with using Black-Scholes to price stock options. The
problems started when people started using it to price their own Grandmothers.

~~~
russell
It didn't work so well at Long-Term Capital Management where they were among
the resident geniuses.

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vomjom
What? Long-Term Capital Management didn't use Black-Scholes. It hired Merton
and Scholes, but used a completely different trading strategy.

They tried fixed income arbitrage with very high leverage. Black-Scholes ONLY
applies to options.

The work that won the Nobel Prize had nothing to do with the downfall of Long
Term Capital Management. Get your facts straight.

Variations of Black-Scholes are still used successfully in the trading world.
The only difference is that no one thinks that returns follow a normal
distribution anymore (but the Black-Scholes formula allows you to choose any
probability distribution you want).

