Tuesday, October 15, 2013

Murphy Attacks the EMH With Evidence of the EMH's Success

By Charlie Clarke

Robert Murphy linked to some articles attacking the Efficient Markets Hypothesis.  Ironically, with the little more hindsight that we have today, we can see that both articles really point to an EMH success.

The articles rely heavily on the claim that Mark Thornton or Austrian Business Cycle Theory beat the market by predicting the housing crash:
Fama says he doesn't see how any of the investors could have predicted the sudden collapse in housing prices. But what if they were familiar with Austrian business-cycle theory, and had read Mark Thornton's 2004 prediction that the boom in housing was too good to be true?
Fama would presumably say that Thornton got lucky, and that his general macro forecasting (using Austrian theory) would "beat the market" half the time and be beaten by the market the other half.
That seems like a reasonable statement.  If Mark Thornton has lots of insight into when the market will be wrong, then he can make lots of money of this insight.  Yet, since the housing price crash, Mark Thornton has been predicting high inflation.  That's not surprise as that comes right out of Austrian Business Cycle Theory and has also taken down wrong famed bubble predictor Peter Schiff after his many hyperinflation forecasts.  Robert Murphy himself made an inflation bet he has since lost.

In hindsight, there is a little more evidence that the Austrians were just lucky.  I should note that these are just two predictions over 10 years, so we are very far from having any data to actually test a theory.  If this is the rate at which Austrian business cycle theory makes predictions, it may take many hundreds of years to actually perform a real test of the predictions.  This highlights some of the challenges of defending EMH.  At any given time, there are numerous predictions that some assets price will rise or fall.  The market proves people right (and wrong) all the time.  And since at any given time there are people both long and short in an asset, any time an asset has a large change in price there are some people making boatloads of money.

No comments:

Post a Comment