More from Scott Sumner on the EMH
Which leads me to post my favorite chart on the supply and demand of EMH:
From: The supply and demand for (belief in) EMH
The downward-sloping (hence "demand") curve shows the extent to which EMH is true as a function of the extent to which people believe EMH is true. At one extreme, if nobody believes that EMH is true, so people believe there is no relation between market prices and fundamental values, then each individual has a strong incentive to research carefully the fundamental values of assets before buying and selling, and so market prices will reflect all the information available to everyone, so EMH will be true. At the other extreme, if everyone believes EMH is true, so that market prices already reflect all available information on fundamental values, then no individual has any incentive to collect and process that information, and everybody picks assets by throwing darts, or buys the index, so market prices will not reflect any available information on fundamentals, so EMH will be false.
Markets, in general, reflect all available information because people don't believe that they can figure out something that the market doesn't know. This has different implications for an asset manager than it does for a central banker.
In which I read more of Brad DeLong's back catalogue: The Triumph of Monetarism? which is a great history of whatever war we pretend Monetarism and Keynesian to be in.
Profits are Good. Falkenblog.
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