A small observation about the Efficient Markets Hypothesis

We’re always amused by the manner in which all too many people don’t think through the implications of their own beliefs and contentions. In this specific case we’re talking about the Efficient Markets Hypothesis. Which comes in three flavours weak, semi-strong and strong. Which, roughly enough and in sequence, imply that all generally known information is in prices, all public information is in prices and all things known by anyone at all are in prices.

It tends to be that the more right-ish economically that you are the further along that spectrum your beliefs. Near every economist will run with the weak version, not all that many with the strong.

We also have the idea that there can be too much finance in an economy. That some to a lot of it is mere paper shuffling which produces no value. This belief is stronger the further left-ish your economic views, generally at least.

Which is, to us, interesting. Because the less market prices reflect knowledge then the more we require a finance industry to process data into information, no? That being what those financial markets do, give us a price based upon the trades that people make given their knowledge base. That is, if we believe the strong version of the EMH then we only need a small finance industry because not much processing of that information is necessary because it’s all already reflected in prices. Equally, if you hold with the weak version then a large finance industry should be necessary.

Yet - in general of course - the views are aligned entirely opposite. Those who believe the weak want a smaller finance industry, those the strong are just fine with what we’ve got.

Sure, we’ve our own thoughts on this - the strong holds because we have a large finance industry which rather aligns us with Robert Shiller on the point - but we do still think it’s interesting that the general positions don’t quite match up at either end of the respective arguments.