Re: transformation
On Sep 20, 2006, at 9:14 AM, Michael McIntyre wrote:
I wouldn’t call a market where prices go apeshit crazy (my words)
an efficient market, so my intent was never to give an opening to
capitalist apologetics. When it comes to markets and information,
I guess I’m much more in line with Stiglitz, Akerloff, etc. who
emphasize how information asymmetries lead to inefficient markets.
For example, I think it was Akerloff who wrote the early paper “The
Market in Lemons” about used car prices.
Yup it was Akerlof.
But what exactly do you mean by efficiency? In financial theory, an
efficient market is simply one that reflects all available
information, which is pretty much true of all deep, liquid financial
markets. The quality of that information is another matter entirely.
Stiglitz & Akerlof want to assume that market participants are
rational, even though they may be differently informed. The first
time I met Stiglitz, late in the dot.com boom, he asked “Why do
people buy those stocks?” That’s a different POV from, say, Robert
Shiller (or master speculators like George Soros) who believe that
markets are venues for mob psychology, which means you can have lots
of periods of apeshit craziness that can go on for a long time. As
the old saying has it - which was quoted somewhere yesterday on the
Amaranth disaster - markets can stay irrational a lot longer than you
can stay solvent. Markets that efficiently reflect apeshit craziness
can be efficient in the financial sense, if not in the colloquial or
engineering sense.
Doug