I noticed Noah Smith and John Authers on Twitter discussing how great the Efficient Market Hypothesis is because it explains why indexing works. I responded saying that the EMH really has nothing to do with why indexing works. They didn’t seem to see my point of view so let’s try this again and see if we can finally get this industry on a path towards understanding how incredibly silly the EMH actually is.
The original EMH stated that markets priced information efficiently. That is, if some news was released the markets would price this so that it was incredibly difficult to take advantage of this new information. This was basically a way of saying that markets work better than people who intervene in a discretionary manner. It’s not surprising that this idea was largely developed by the Chicago School of Economics during the period of Milton Friedman’s reign of terror because this established a theory of finance that was consistent with a theory of economics that was inherently anti government (interventionist).
Since then, the theory of economics has basically collapsed as it’s been proven largely false.
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