The ignorance of markets
In my latest post at Pieria, I complain about trading strategists who don't do their homework:
"There is considerable debate about whether markets are efficient, and whether investors are rational. To me it is self-evident that investors at times are anything but rational and markets at times are anything but efficient, but I will leave the economists to argue about that. If anyone really wants to know more about the limitations of the efficient markets hypothesis, read this post by Euronomist. And for more on whether or not human beings really are rational utility maximisers - as is implied by the rational expectations hypothesis - read this post by John Aziz.
When it comes to monetary policy, though, all too often we are not dealing with inefficiency or irrationalilty, but simple ignorance....."
The rest of the post can be found here.
"There is considerable debate about whether markets are efficient, and whether investors are rational. To me it is self-evident that investors at times are anything but rational and markets at times are anything but efficient, but I will leave the economists to argue about that. If anyone really wants to know more about the limitations of the efficient markets hypothesis, read this post by Euronomist. And for more on whether or not human beings really are rational utility maximisers - as is implied by the rational expectations hypothesis - read this post by John Aziz.
When it comes to monetary policy, though, all too often we are not dealing with inefficiency or irrationalilty, but simple ignorance....."
The rest of the post can be found here.
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Frances, all good stuff.
ReplyDeleteBut a quibble. You describe City Index as a "major firm." They're bookies. I'm just about prepared to take bankers seriously, but bookies?
Luke, that's not how they describe themselves:
Delete"One of the leading providers of spread betting, CFDs and forex trading in the UK, City Index has nearly 30 years’ experience in the industry."
And Wikipedia describes them as "a broker providing online financial spread betting, FX and CFD trading".
Who am I to disagree?
Though spread betting is arguably gambling, really. In which case what were Reuters thinking of? They might as well have asked Paddy Power.
On second thoughts maybe I'm harsh on bookies. A fine body of people, who selflessly provide us with real life examples of how people assess risk, without crashing a car, let alone an economy.
DeleteSpread betting is pretty similar to what normal brokerages do, and indeed their strategists will deliver similar messages, so I think it was as good an example as any. That said the aim of broker research is to make customers churn to collect trading fees, so their understanding of the economy is of no relevance to how good they are at their jobs. Optimally, they should change their opinion as often as humanely possible without the clients noticing they're spinning aimlessly. There's nothing to take away from that regarding market efficiency.
DeleteThe inflationists' view similarly is mainly that of some vocal commentators, who are not market participants. The market hasn't priced any significant inflation in the past few years, nor going forward. So no obvious inefficiency here: market predictions and reality are broadly aligned.
Yes, Reuters might as well have asked Paddy Power.
ReplyDeleteCity Index will say/do anything to get punters "trading", being the counterparty to their clients trades and being safe in the knowledge that the vast majority of retail traders lose money.
Not that I have a problem with this business model, nobody is putting a gun to anybody's head, but if City Index are not trading their own money based on their analysis I would take what they say with a pinch of salt. So not a good example to use in summary.
Money week your analysis.
ReplyDeleteBut then they lose the plot and start comparing the UK to Greece again. Greece had falsified its debt position and deliberately misled investors as to the true state of its public finances. Is it any wonder there was a buyer's strike? And what on earth is the reason for supposing that the UK would suffer the same fate?
I know your trying to pick holes which is always an easy thing, Remember LIBOR surely you will agree that is FALSIFYING a position.......
Is there a reason why you have posted your comment here rather than on "The End of Britain?" ?
DeleteI'm afraid your comparison is simply ridiculous. LIBOR is an international benchmark for interest rates and it is set by financial institutions, not by national governments. The financial institutions that dumped Greek bonds were the same ones whose traders were falsifying LIBOR.