A few comments on the EMH

Two arguments are commonly made against the EMH:

1.  It is obviously wrong

2.  Statistical studies have refuted it

1.  Let’s start with the first point.  People say that the housing market was obviously a bubble.  When I point out that if it so easy to see when markets are overextended, then it should be easy to beat the market (if you can wait it out, and have enough capital.)  People say “But Warren Buffett does that, and he does beat the market.”  Here is Warren Buffett on the housing bubble:

The billionaire said Moody’s erred by rating so many mortgage-related bonds as triple-A, though 300 million other Americans also made the same mistake. “Look at me. I was wrong on it too,” Mr. Buffett said.

Inflated real-estate values turned out to be a “four-star bubble,” not a “bubble-ette,” as Mr. Buffett previously concluded.

Of course a huge negative shock to NGDP can easily turn a bubble-ette into a 4 star bubble, so I’m willing to cut Mr. Buffett some slack.  BTW, I suppose Buffett does deserve credit for predicting the bubble-ette, my point is that it was almost impossible to predict the massive housing bust, and I still think that those who did just got lucky.

Part 2.  Poor, poor pitiful Protestants

I grew up in a Protestant family, but until now had never realized that this group is an underprivileged minority group, er, I mean underprivileged majority group.  Over 51% of Americans are Protestants, and yet not one Supreme Court member is Protestant.  I believe that the odds of that happening randomly are less than 2 in 1000.

Now I suppose some of you will try to convince me that it’s just a coincidence.  But you can’t fool me; I studied “statistical significance” in college.  I know a statistically significant finding when I see one.  It would be like arguing that all those “market anomaly” studies are wrong, because they rely on tests of statistical significance.

If you are especially clever you might say I have the wrong sample.  What matters is not the Protestant share of the total population, but rather their share of the grads from elite colleges, from which we choose our Supreme Court justices.  And only 25% of students at Ivy League schools are Protestant.  Here’s my response to that: “Oh yeah, well that just shows that the Ivy League schools are also prejudiced against Protestants.”

If the average American WASP woke up in 1910 to find that 6 out of 9 Supreme Court justices were Catholic, they would have been terrified that Rome was in control of our Court.  And I can’t even imagine the reaction if you told them that the other three justices were Jewish.  But in 2010, only a few reactionaries like me have even noticed.  One hundred years from now people will be amazed to read in a history book that back in 2010 Christians, Jews, Hindus and Moslems didn’t get along in many parts of the world.  People who are told this will say; “Eh, what was that all about?”

(Note, whenever I post some nonsense like this, I feel obligated to quickly cover it up with something more substantive.  I look forward to reactions to my next post—which should be controversial.)