I read your wiki posting, now you read my mises daily
I read it, and I consider the article a satisfactory explanation of what I was suggesting, but I don’t consider the counterargument convincing.
Consider this: mutual funds don’t beat the market. Index funds are a better source of ROI.
can you explain how mutual funds exist in the marketplace?
Yet every profitable business does it on a daily basis.
Clayton -
An index fund is just another kind of mutual fund… where the stocks mix is picked by the board at Dow Jones or wherever. Apparently the board of Dow Jones has been imbued with the prophetic spirit of God (or Market or whatever you want to call Him).
Clayton -
Yet every profitable business does it on a daily basis.
No they don’t. There’s a difference between accounting and economic profit. The beauty of the free market is that the economic profit goes to zero, as long as you don’t create artificial barriers to entry.
“Beating the market” is different than making a return.
if by ‘beating the market’ you mean an entrepreneur can ,for a period of time, earn a profit higher than the rates that other entrepreneurs are earning in their endeavours, then it seems you deny that the profit and loss statements of various firms show variance.
Nigraham, that would be right if Clayton had claimed some businesses beat the market. Instead, he claimed every businesses with a positive return does.
Edit; If you were replying to Neoclassical’s “you can’t beat the market!”, you’re right if he meant “at any point in time”.
Edit; If you were replying to Neoclassical’s “you can’t beat the market!”, you’re right if he meant “at any point in time”.
Now, if we can assume the latter statement is what Neoclassical meant, then I must say not only is it very interesting, it reaches the nub of the issue under discussion. It would imply, when recognised explicitly, that neoclassical economists who hold the same thesis as he does must abide by an ergodic hypothesis regarding time and statistical averages of economic data. In statistical physics, we use such a hypothesis when analysing and computing averages of the properties of particles, and it is pragmatic since the bulk average of properties over many particles is easier to compute, while the time average of a particle undergoing a “random walk” over time is easier to measure(of course the measurements are actually in bulk for a number of particles over a period of time, but I digress).
Now the assumptions underlying the application of this hypothesis are recognised as reasonable in the analysis of phenomena, when we can assume our particles to be fairly homogenous to a good or exact approximation, or in the other words, when their heterogeneity cannot actually produce divergences in the measurements we make of both data. In that case, it becomes useless. It would seem to me, just the “empirical insight”, recognised by Austrians, that forms a part of their deductive apparatus from which their conclusions are derived; that humans are essentially unequal in regards to producing different products, not withstanding the fact that this is the formative factor producing a commercial society and the division of labour, would essentially negate the usefulness of such a statistical treatment? Would be interested in your thoughts Neoclassical, and if I’ve interpreted you correctly.
P.S. I hope you stick around.
Thanks! I was somewhat ready to leave today when a moderator claimed I was repeatedly being “intellectually dishonest” and censored some of my replies. But I’m still here.
I would claim the stock market, though, is not ergodic; it does not return to a state it has been in before. Rather, I consider it erratic and unpredictable (although I do believe it is rational, making use of all available information).
For any period of time that one looks at the market, a profitable business over the same period of time disproves the hypothesis that you can’t beat the market. And I deny that there is any meaningful definition of “beating the market” except profitability. If I buy X, Y and Z stocks and later sell them at a profit, I have “beaten” the market. If the sum of my buying and selling activity over time is profitable, then I am “beating the market.” Whether you look at it for a particular transaction or for many transactions over an arbitrarily large period of time, the fact remains that it is possible to earn a profit buying and selling stocks (or speculating in anything else), therefore, it is possible to “beat the market.”
Clayton -
For a treatment of my thoughts, everyone please read: http://www.princeton.edu/~ceps/workingpapers/91malkiel.pdf.
Quoting Malkiel, The efficient market hypothesis is associated with the idea of a “random walk,” which is a term loosely used in the finance literature to characterize a price series where all subsequent price changes represent random departures from previous prices. The logic of the random walk idea is that if the flow of information is unimpeded and information is immediately reflected in stock prices, then tomorrow’s price change will reflect only tomorrow’s news and will be independent of the price changes today. But news is by definition unpredictable and, thus, resulting price changes must be unpredictable and random. As a result, prices fully reflect all known information, and even uninformed investors buying a diversified portfolio at the tableau of prices given by the market will obtain a rate of return as generous as that achieved by the experts.
This is a really bizarre claim and I think it’s false right on its face. If we abstract the market at a sufficiently high level, stocks are not qualitatively different from any other good, that is, buying a stock is no different than buying a car or buying any other good. The implication of Malkiel is that random purchases of goods is as profitable as an informed purchase of specific goods with the planned intent of making a profit. That is, the “uninformed investor” in cars or wheat or office space or emus or shares of IBM or whatever will earn just as good a profit as specialist entrepreneurs will, over time. This seems to be an implicit denial of Misesian calculation and of the utility of profit & loss in improving entrepreneurial speculation.
Clayton -
Bizarre? Well, it is very counterintuitive! I bet you’ll have fun reading about how he defends the idea.
I would claim the stock market, though, is not ergodic; it does not return to a state it has been in before. Rather, I consider it erratic and unpredictable (although I do believe it is rational, making use of all available information).
Do you mean rational in the Misesian or neoclassical sense? The progression of the market, like the future and future knowledge, is uncertain otherwise we would already know it. A lack of long run equilibrium automatically rules out in that case an ergodic critique, since another necessary condition is removed since we can no longer imply equivalnece of time and bulk averages necessarily… Why however must we rule out the possibility of a market being beaten by an entrepreneur or several entrepreneurs in the long run (even keeping weary of the distinction, lest we talk past each other that profit must be distinguished from interest when analysing the Austrian treatment)? If the EMH rules this out using probability calculus, isn’t it contradicting itself conceptually, since it would be assuming complete statistical knowledge about future entrepreneurial success, the kind of hindsight it explicitly denies to the individuals themselves?
I’m starting to feel there would be a lot to say in a full Misesian reply to the EMH, and the paper you linked. Would appreciate more links from both sides on this subject.
EDIT:
I made a mistake in my discussion of ergodicity…unpredictabillity of future macroscopic progression is a valid exclusion from use of ergodic hypothesis…
Let me quote Eugene Fama, “An ‘efficient’ market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.”
I hope that makes sense. You can make average returns, but you’ll never make above-market returns. To put it more bluntly, if you get unusually rich from investments, then you just got lucky.
I agree with Fama for free markets, but I agree with the Austrians that markets are far from free.
I hope that makes sense. You can make average returns, but you’ll never make above-market returns. To put it more bluntly, if you get unusually rich from investments, then you just got lucky.
Why can’t we say the same thing about losses?
In what sense?