Tuesday, February 20, 2007

EMH Stikes Back

From iStetve

is that if you took your economics courses seriously, they would cripple your drive to make a bundle in the business. The Efficient Markets Hypothesis, for example, really does inspire the old joke about the two University of Chicago professors walking down the street who see a $20 bill lying on the sidewalk. They think about picking it up, but keeping walking because it's much more likely that they are both suffering mutual simultaneous hallucinations than that the free market would be so inefficient as to leave a $20 bill lying around.


The EMH simply says that the return from picking up $20 bills cannot consistently exceed the opportunity cost of looking for them. Otherwise people would be quitting their jobs to look for $20 bills.

It is entirely possible that you find a $20 bill by accident. It is also, in direct reference to Steve’s point, possible that you could be hired to look for $20 bills by a bill-looking firm.

You should, however, not expect to make tons of money striking out on your own, unless you have some unique, unreplicatable ability to find $20 bills.