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  • EMH Vs. “Irrational Exuberance”

    Posted by Sulaiman on October 18th, 2004 (All posts by )

    WSJ ran an article today (subscription required) on the continuing debate between efficient market theorists and the so-called behaviorists who have set up shop at Friedman’s old office. I don’t know about the “boyz” but I continue to split my funds three ways in both my personal account and in 401K: International Index, Russell 2000 Index, and SP 500 Index. As the “behaviorists” concede, I find it hard to beat the market over the long-run. And in my case, long-run is when I die most probably in about 40 years or so.

    Addressing the Social Security problem will be one of the most important domestic issues in the next four years regardless of who wins the November election. I suspect we will be hearing more of this topic in forthcoming years.



    4 Responses to “EMH Vs. “Irrational Exuberance””

    1. Jonathan Says:

      Sulaiman, welcome!

    2. John Says:

      EMH has been dead. It’s been dead since Bachelier decided that the markets are random and conforms to a Gaussian Distribution, Markowitz created MPT and Sharpe created CAPM, etc. Garch is just a fix for a sinking ship. Include VAR in that ship too.

      Read Benoit Mandelbrot’s “The Misbehavior of the Markets”.

    3. Fritz Meyer Says:

      Both theories are collaborative. If markets are not efficient, they interfere with rational decision making. The bubble, caused by savings concentration from budget surpluses, resulted in a crash changing the protocol of rational behavior in investing. An efficient and effective re-pricing mechanism.

    4. ed white Says:

      Could anyone shed a bit of light on an issue I have been long thinking about, It relates to the issues of EMH and the ideas of markowitz and Fama. Is the concept of designing a portfolio akin to Markowitz consistant with the theory of EMH??