Tilting Against The Market’s Use of Available Information

Guest Post by Michael Phillip

[A]ll the efficient market hypothesis (EMH) says is that markets use all available information. Which does not sound like much until one works through the implications. One of which is, as William Easterly states, economists correctly predicted that they could not correctly predict. In Cochrane’s words:

“It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.” – John Cochrane