Did I ruffle a few feathers? :)

Doug Henwood dhenwood at panix.com
Fri Sep 22 08:44:51 MDT 1995

At 10:47 AM 9/21/95, Chris M. Sciabarra wrote [in response to me]:

>> Second, and related point. A lot of interesting work (Shiller, Summers, &
>> Co.) since the early 1980s has demonstrated that traditional notions of
>> market efficiency in financial asset pricing are a lot of hoodoo. Financial
>> market prices, which are the freest of all - free to change minute to
>> minute, with no single player able to gain appreciable market power -
>> gyrate all over the damn place, overshooting a rational price on both the
>> upside and the downside. This suggest that there's at least as much noise
>> as there is signal in the prices.
>        There sure is... markets are dynamic, not static, and the web of
>interconnections is so complex that no single theorist could possibly
>understand its sophistication simply by analysis.  That's what separates
>economists who analyze and entrepreneurs -- WHO MAKE MONEY!  :)
>> Obviously, total central planning is absurd. But a price is one signal
>> among many. Sometimes rational humans, those who care about planning for
>> the next 10 or 100 years, should ignore their message.
>> Doug
>        It may be... except that I'm not in a position to say which
>signals should be ignored and which shouldn't, and investing that
>decision in the hands of people who may not know what they are doing
>could be catastrophic.  Granted, you admit central planning is absurd,
>but the more centralized the planning the worse it is, because error
>cannot be localized under such a system; it is fully systemic and

If I had a nickel for every time I heard the phrase "prices are a
signalling mechanism" I'd probably voting Republican. But I've never heard
a good response to the noise critique, and after reading this, I still
haven't. If the freest markets imaginable, the modern large financial
market, show persistent mispricing (to the point that even one of the
former gurus of efficient market theory, Eugene Fama, has pretty much
repudiated it), then that questions the validity of this nostrum. Sure
prices signal something, but what?



Doug Henwood
[dhenwood at panix.com]
Left Business Observer
250 W 85 St
New York NY 10024-3217
+1-212-874-4020 voice
+1-212-874-3137 fax

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