Feel tempted to play the markets? How much more tempted would you be if you were a professor of finance, certified as an expert whose main job was to study such markets? Turns out, most finance profs know enough to know they don’t know enough to bet:
I'm sorry - but did you miss the second half of the paragraph?
Third, our respondents’ perceptions regarding market efficiency are almost entirely unrelated to their trading behavior. Fourth, the investment objectives of professors are, instead, largely driven by the same behavioral factor as for amateur investors – one’s confidence in his own abilities to beat the market, independent of his opinion of market efficiency.
Finance professors might say they believe in EMH, but their behaviour says otherwise. They seem to believe that "The market is efficient for everyone except me."
Put conversely, all the active traders, hedge fund managers, prop desk traders etc might agree as much as finance profs that "markets are efficient", but that doesn't stop them from going to work in the morning.
Not saying I don't believe you, I just have never heard of what you claim (I haven't done a lot of research on it). Do you know of any online articles or papers that explain this, google has failed me.
That's not the correct probablity to look for. Since you are trying to argue that since you (1 person) has had 60 straight days of gains, the EMH is flawed; you need to find the chance that at least 1 person would have had such luck since the stock market was created. I don't feel like doing the math, but the odds are a ton higher than 1 in 2^60.
I fake traded also and out of 60 days probably had 40 gains. The probablity of my exact results happening (gaining the days i gained and losing the same days i lost) is 1 in 2^60 also, but that doesn't really mean anything
All, according to the EMH theory, daytraders are mostly compensated for providing liquidity. Most daytraders use simple strategies based on market microstructure; they don't try to improve on the market's evaluation of fundamental values.
I am daytrading the emini S&P 500 contract many times per day, and haven't had a losing day in 3 months. According to EMH theory I am just supremely lucky (let's say I only traded 60 days out of the past 90 due to vacation and holidays and weekends, and the average trading win/loss percentage over a day is a coin flip -- that would make my performance possible by chance at 1 in 2^60, or 1 in 1,152,921,504,606,846,976). I don't think so. . .
Would you trust them to design an antenna without oversight if the cost of the design was most of your net worth? And if they would have no way to give the money back if they failed?
I believe they just mean they ran a regression trying to predict each person's trading behavior based on their perceptions of market efficiency, and found that their respondents are no more (or only slightly more) likely to actively invest if they believe markets are less efficient. They're not saying "it doesn't make sense that this group would passively invest while believing in weak or semi-strong EFT," they're saying "beliefs in EFT were not a powerful predictor of investment behavior for individuals within this group."
1. As said many times before, once people start believing the EMH is true, it will stop being true. The only reason EMH exists is because people don't believe it. (hopefully, i said it correctly, i'm working on very little sleep)
2. To Matthew and illuminatus. I am sure I can find 2 people who have lost equal amounts in the past year (or whatever your timelines are). If your 2 examples disprove the EMH, then my 2 would prove it again.
But isn't most compensation in hedge firms locked up in the company, with long periods until withdrawal? That gives them at least a small stake in the hedge fund.
Most people are just noise traders, or worse, fools. No matter how much the professors tell them to just buy indexes, there will always be many who ignore them. But you can at least try to help those who will listen. Leave the markets to the financial sector.
Worrying about the market becoming inefficient because of the statistical research is like worrying about those poor tobacco companies once the tobacco-death link has been proven. (On a side note, global tobacco use is apparently increasing.)
Next week, I'm closing out a year on sim account daytrading S&P futures.
+560%. It would be a lot higher but the maximum size the sim will allow me to trade (default size, which I need to use for execution speed) is 10 contracts. I have not had an unprofitable day (after commissions) for 3 months. In the next month or so I will start trading live.
There's your "efficient market" for you. . .
However I will admit it is far easier to see and learn the daytrading patterns than the longer term patterns (since with daytrading you can see hundreds of pattern reps in a year instead of a handful or a couple dozen of pattern reps). Also the S&P futures market is highly utilized by large players who make lots of easy-to-read "dinosaur footprints" as they move into and out of positions. So you can see them and frontrun them. I did not have the same amount of success daytrading equities.
BTW the main reason the market is up so much is fear / belief that the Fed is destroying the dollar through QE. . . If that belief changes then the current equities bubble will collapse again, since the macro / fundamentals right now are absolutely horrific. . .
I'm sorry - but did you miss the second half of the paragraph?
Third, our respondents’ perceptions regarding market efficiency are almost entirely unrelated to their trading behavior. Fourth, the investment objectives of professors are, instead, largely driven by the same behavioral factor as for amateur investors – one’s confidence in his own abilities to beat the market, independent of his opinion of market efficiency.
Finance professors might say they believe in EMH, but their behaviour says otherwise. They seem to believe that "The market is efficient for everyone except me."
Put conversely, all the active traders, hedge fund managers, prop desk traders etc might agree as much as finance profs that "markets are efficient", but that doesn't stop them from going to work in the morning.
anon,
Not saying I don't believe you, I just have never heard of what you claim (I haven't done a lot of research on it). Do you know of any online articles or papers that explain this, google has failed me.
Matthew,
That's not the correct probablity to look for. Since you are trying to argue that since you (1 person) has had 60 straight days of gains, the EMH is flawed; you need to find the chance that at least 1 person would have had such luck since the stock market was created. I don't feel like doing the math, but the odds are a ton higher than 1 in 2^60.
I fake traded also and out of 60 days probably had 40 gains. The probablity of my exact results happening (gaining the days i gained and losing the same days i lost) is 1 in 2^60 also, but that doesn't really mean anything
I'm confused, you're just fake trading. You're not actually *up* any money. What are you bragging about?
All, according to the EMH theory, daytraders are mostly compensated for providing liquidity. Most daytraders use simple strategies based on market microstructure; they don't try to improve on the market's evaluation of fundamental values.
Paul,
I am daytrading the emini S&P 500 contract many times per day, and haven't had a losing day in 3 months. According to EMH theory I am just supremely lucky (let's say I only traded 60 days out of the past 90 due to vacation and holidays and weekends, and the average trading win/loss percentage over a day is a coin flip -- that would make my performance possible by chance at 1 in 2^60, or 1 in 1,152,921,504,606,846,976). I don't think so. . .
Yes, there are some I would trust to do that. Not many, but definitely some.
Would you trust them to design an antenna without oversight if the cost of the design was most of your net worth? And if they would have no way to give the money back if they failed?
I believe they just mean they ran a regression trying to predict each person's trading behavior based on their perceptions of market efficiency, and found that their respondents are no more (or only slightly more) likely to actively invest if they believe markets are less efficient. They're not saying "it doesn't make sense that this group would passively invest while believing in weak or semi-strong EFT," they're saying "beliefs in EFT were not a powerful predictor of investment behavior for individuals within this group."
Also, to Matthew,
QE means nothing if you are paying interest on reserves. But that debate is probably far too off topic to have here.
2 things:
1. As said many times before, once people start believing the EMH is true, it will stop being true. The only reason EMH exists is because people don't believe it. (hopefully, i said it correctly, i'm working on very little sleep)
2. To Matthew and illuminatus. I am sure I can find 2 people who have lost equal amounts in the past year (or whatever your timelines are). If your 2 examples disprove the EMH, then my 2 would prove it again.
My Vanguard account and I feel so validated.
But isn't most compensation in hedge firms locked up in the company, with long periods until withdrawal? That gives them at least a small stake in the hedge fund.
Most people are just noise traders, or worse, fools. No matter how much the professors tell them to just buy indexes, there will always be many who ignore them. But you can at least try to help those who will listen. Leave the markets to the financial sector.
Worrying about the market becoming inefficient because of the statistical research is like worrying about those poor tobacco companies once the tobacco-death link has been proven. (On a side note, global tobacco use is apparently increasing.)
Next week, I'm closing out a year on sim account daytrading S&P futures.
+560%. It would be a lot higher but the maximum size the sim will allow me to trade (default size, which I need to use for execution speed) is 10 contracts. I have not had an unprofitable day (after commissions) for 3 months. In the next month or so I will start trading live.
There's your "efficient market" for you. . .
However I will admit it is far easier to see and learn the daytrading patterns than the longer term patterns (since with daytrading you can see hundreds of pattern reps in a year instead of a handful or a couple dozen of pattern reps). Also the S&P futures market is highly utilized by large players who make lots of easy-to-read "dinosaur footprints" as they move into and out of positions. So you can see them and frontrun them. I did not have the same amount of success daytrading equities.
BTW the main reason the market is up so much is fear / belief that the Fed is destroying the dollar through QE. . . If that belief changes then the current equities bubble will collapse again, since the macro / fundamentals right now are absolutely horrific. . .
Nothing beats being lucky. I would rather be lucky than good. Being a small fish in a big pond helps too.