Another anti-EMH argument bites the dust

When I started blogging I would occasionally defend the EMH.  A number of anti-EMH arguments were offered in response.  One by one they’ve all fallen by the wayside.  People who predicted the 2008 crash have done poorly since.  Hedge funds were held up as a way of earning excess returns—and they’ve done poorly in recent years.  I was told Australian house prices would crash any day now, and am still waiting.  Bitcoin was a “bubble” when the price hit $30—what’s the price today?  Shanghai house prices were a bubble—now I’d love to buy in at 2009 prices.  Oh wait, “if I just wait long enough, prices will fall”.  Is that so Sherlock?  Highly volatile asset prices occasionally go down?

And I was told that the smart guys who ran the Harvard endowment could consistently outperform the market . . .

. . . until they couldn’t.  Tyler Cowen directed me to this from the student newspaper:

Harvard faces numerous pressing issues: a suboptimal social scene, growing competition from other universities for talent, and critical challenges to diversity and inclusion. Unfortunately, last week brought another, this time in the form of a renewed challenge to the endowment’s stable growth. Specifically, Harvard Management Company announced a $2 billion loss for fiscal year 2016.

Let’s not mince words: this is unacceptable.

Over the past several years, Harvard’s endowment returns have failed to keep pace with peer schools’ returns. In fiscal year 2015, Harvard ranked penultimate among Ivy League institutions, with Princeton besting Harvard Management Company by nearly seven points. At the time, University President Drew G. Faust referred to these poor results as “concern[ing].” This year’s loss is only the culmination of this underperformance since the financial crisis.

When I was in college the “Daily Cardinal” protested against the military, racial injustice, limits on free speech, etc.  Now college students find it “unacceptable” that the rich aren’t getting richer at the pace they had grown accustomed to.

PS.  It appears their recent underperformance is more about picking the wrong markets (EMs) rather than the wrong stocks.

PPS.  I see Bitcoin is now over $600.  That means if you invested in 10 such markets back when bitcoin was $30, and nine subsequently crashed to zero, while the other went up 20 fold, then the 9 that crashed would not have been bubbles, or at least there is no evidence that they would have been bubbles.  And yet I’m quite certain that the people who claimed those 9 were “bubbles” , would have felt vindicated.  I don’t know of any area in the social sciences where cognitive illusions are more powerful, and more misleading.



16 Responses to “Another anti-EMH argument bites the dust”

  1. Gravatar of marcus nunes marcus nunes
    1. October 2016 at 14:37

    One of our Tenets:

  2. Gravatar of foosion foosion
    1. October 2016 at 14:39

    You don’t have to be pro-EMH to invest in broadly diversified low cost index funds, which seem to beat just about everything over time.

    EMH basically states that price reflects all available information (where the definition of available may vary based on the applicable flavor of EMH). I continue to question the precise meaning of “reflect”.

  3. Gravatar of Britonomist Britonomist
    1. October 2016 at 15:01

    Why do you only consider trades from a long term investment? There is absolutely no rational justification for the ridiculous price surges in late 2013/14 for bitcoin and then the subsequent massive collapse. Everyone knew it was pump and dump from China & elsewhere, these weren’t calculated investments.

  4. Gravatar of Major.Freedom Major.Freedom
    1. October 2016 at 15:02

    “People who predicted the 2008 crash have done poorly since. Hedge funds were held up as a way of earning excess returns—and they’ve done poorly in recent years.”

    Sumner these poor excuses you call falsifications of anti-EMH are easily understood as false when you use the same logic in other contexts.

    By this logic, Usain Bolt’s winning track record is mere luck, because he wins and wins and wins, but then he will eventually stop winning. Therefore his success cannot possibly be the result of special skill, talent and hard work, for if these were the reasons, then he would keep winning forever.

    Or, consider Bobby Fisher or Gary Kasparov the chess champions. They won and won over and over again, but then they stopped winning. By your logic this proves that their success was just luck. For if their success was the result of special skill, talent and genius, then they would have kept winning forever.

    Or, consider musical talents. Bob Dylan produced genius works during the 1960s. Some of the best most influential music in history. But today he isn’t producing anywhere near the quality of work as compared to Blonde on Blonde, or Highway 61 Revisited. By your logic this proves that musical talent is also nothing but pure luck, and has nothing to do with special skill, talent, or hard word. For if his success was about those things, then he would be producing the best records forever.

    Here is a little secret: Investors are also people. Weird huh? Investors are also people who can have above average skill, talent and work ethic to be more successful than their peers. The fact that a given investor cannot “beat the market” year after year forever does not prove the market is efficient, or that anti-EMH is false. It means that the factors you deny are responsible for beating the market, namely skill, talent, hard work, and genius, are TEMPORARY. A person has a prime of their lives for a given skill. Warren Buffet cannot keep beating the market year after, not because the market is efficient, but because other investors develop and utilize BETTER skills, talents, hard work, and genius.

  5. Gravatar of Garrett M Garrett M
    1. October 2016 at 17:20

    The SPIVA report cards recently started focusing on gross mutual fund performance relative to passive indices. Before, when they focused more on net returns, a common argument was that professional managers have stockpicking skill, but fees eat the outperformance. Now, it’s clear that the median manager under performs on a gross basis, and there’s still no way to forecast which managers will outperform.

  6. Gravatar of Scott Freelander Scott Freelander
    1. October 2016 at 19:05

    Yes, I’ve become increasingly skeptical about bubble claims over the years as I’ve read this blog. Markets are often very misunderstood.

  7. Gravatar of ssumner ssumner
    1. October 2016 at 19:06

    Britonomist, You said:

    “Everyone knew it was pump and dump from China & elsewhere”

    Obviously everyone did not. If I knew that I’d be rich now. The people trading bitcoin did not know that.

    Thanks Garrett.

  8. Gravatar of Ray Lopez Ray Lopez
    2. October 2016 at 02:51

    As MM says, Sumner gets EMH all wrong. According to Sumner, if a price of something goes to the moon and crashes back to earth, and then, if you wait long enough, as in 100s of years, and it goes back to the moon, ‘it’s not a bubble’! That’s how much an air-head Sumner is. “To da moon Alice!”- J.Gleason. Sumner, once again, confuses nominal with real.

  9. Gravatar of Britonomist Britonomist
    2. October 2016 at 07:06

    “Obviously everyone did not. If I knew that I’d be rich now. The people trading bitcoin did not know that.”

    Even if you know prices are ridiculously elevated, that doesn’t mean shorting is always a good strategy (is it even possible to short bitcoin by the way?):

    ‘The market can stay irrational longer than you can stay solvent’

    Plus it may have been easier and more immediately rewarding to play along, fueling the price rises further.

  10. Gravatar of Jure Jure
    2. October 2016 at 10:49


    I guess you could short bitcoin by buying other popular cryptocurrencies, since they would get larger market share. But I am not sure if you can efficiently short cryptocurrencies as a whole.

  11. Gravatar of Bob Murphy Bob Murphy
    2. October 2016 at 14:08


    I’ve got another great example of a patently absurd statement that violates the EMH:

    “The easiest short sales I’ve ever had in my life were the stocks and bonds of Donald J. Trump’s companies. … It was like numerous ocean liners hitting many icebergs repeatedly.” — Jim Chanos, Kynikos Associates

    And some economists hate Trump so much that they are repeating the above absurdity to their readers without commenting on how ridiculous it is. Can you imagine?!

  12. Gravatar of ssumner ssumner
    2. October 2016 at 16:25

    Britonomist, You said:

    “The market can stay irrational longer than you can stay solvent’”

    Amazing. No matter how many times I shoot that one down, it keeps popping up.

    Bob, That was a joke. And are there any economists that don’t hate Trump that much? If so, what the hell is wrong with them!

  13. Gravatar of Nomination Nomination
    3. October 2016 at 05:28

    […] I put forward my own name for Best Troll on an Economics Blog in 2016. Here’s but one example. […]

  14. Gravatar of Bob Murphy Bob Murphy
    3. October 2016 at 08:43


    I know it ruins a joke to explain it, but what exactly do you mean? Sure, Chanos was saying that to elicit mirth, but I don’t think he really meant to say, “The market valuation of Trump stock was a random walk with drift.” I think he really meant that anybody with common sense knew to short Trump stock, since that guy was such a lousy businessman.

    Which of course would violate EMH 101.

    And when you blogged about it, I got the sense that you thought it was funny because it tied into your general argument that Trump was The Worst Person Alive.

    Did I miss something?

  15. Gravatar of ssumner ssumner
    3. October 2016 at 09:33

    Bob, Yup, see my new post.

  16. Gravatar of David R. Henderson David R. Henderson
    3. October 2016 at 11:56

    “On the other hand, Trump is very loyal to the people around him, or at least so claims his third wife.”
    Great line of the day.

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