Point of information regarding the efficiency of financial markets and arbitrage
"Generally speaking, the wisdom of the crowd,
aka the markets, are smarter than individuals, even "experts".
Most experts believe the market is "efficient" in the long run.
That means it "prices in" all available information.
The reason is simple.
If there is an inefficiency, traders will exploit that and do arbitrage.
Which is just making money on the difference.
Because of that, the inefficiency goes away - the trades exist until there
is no spread. Because making money is a time-cconstrained sport (down to milliseconds), the inefficiencies don't last long at all.
If we look at the current "futures" and markets, stocks are up in Asia and USA.
This is because Trump is seen as backpedaling on Huawei.
Which the market seems to think means movement toward trade agreements.
The "information" should include political and jobs info.
Now I'm not a "conservative", and this is fairly standard WSJ/MBA type of stuff, but it makes common sense."
https://rumsoakedfist.org/viewtopic.php ... 7&start=75EFFICIENT MARKET HYPOTHESIS AND ITS CRITIQUE FROM BEHAVIORAL FINANCEThe behaviour of contemporary financial markets is explained by two competing theories, the Efficient Market Hypothesis (EMH) and Behavioural Finance. The EMH assumes full rationality of investors, instant distribution of information across the market and thus its complete absorption by stock prices. Meanwhile, behavioural finance accounts for psychological factors and motives in investor behaviour claiming that these motives may significantly influence the investor’s decision making. . .
The EMH proposes that beating the market and receiving extra profits from studying historical stock prices is impossible in theory. The core driving force affecting price changes is the appearance of new information. In an “efficient” market, prices react to information instantly, reflecting it objectively and without bias. Thus, stock price cannot be “too low” or “too high” as it objectively reflects current situation. Stock prices change fast and any arbitrage opportunities that may emerge resolve very quickly. Even financial ratio analysis and fundamental analysis of stocks is believed to be useless in pursuit of abnormal returns. The main driver of the appearance of an efficient market is strong competition among investors and traders. The skill to recognise mispriced stocks with their market value deviating from the fair value is very useful as investors would be able to make riskless profits but according to the EMH this is impossible. For obtaining new information faster, investors strive to reveal mispriced stocks and spend many resources on that. Gradually, more investors compete for gaining advantage and probability for arbitrage becomes lower and lower. In reality, only a very small group of large investors whose deals can affect market prices will benefit from recognising mispriced stocks, while for most investors the costs of receiving information and transaction fees will be higher than potential profit.
EMH is based on several assumptions that simplify the reality. However, these simplifications are too rough; so, they do not hold in real life and are a point of criticism of the theory. The most significant criticism of the EMH comes from the behavioural finance, which links investment decisions to human psychology and explores human subjective motives for particular actions in the financial markets. Critical remarks of behavioural finance regarding the EMH are the following.
The main underlying assumption of the EMH is that investors exhibit totally rational behaviour. This implies that they are risk averse and are interested in acquiring assets with the highest yields or returns given a certain acceptable level of risk. It is noteworthy, however,
that the EMH does not require all investors to be fully rational. The market may be still efficient if some individual investors are irrational but group decisions are rational.Empirical evidence shows that the assumption of complete investor rationality does not hold in real life. First, total rationality is difficult to determine as there always may be a chance of temporary irrational actions or motives. Second, human behaviour is frequently unforeseeable, and subjective motives such as emotions, herd instinct or panic behaviour may prevail over rationality. The investor rationality as a concept is linked to the conservative scientific paradigm of mechanistical essence of human being. It was suggested in the previous centuries that the nature and people are only mechanistic systems comprising visible elements without accounting for complex relationships between the parts of these systems. Therefore, spiritual and moral values, illogicality of a human’s mind, absence of direct and clear interest and serendipity are not perceived as substantial determinants of the economic thinking. Only later, research and experiments in the fields of psychology, sociology and economics revealed the important role of these stimuli in human decision making.It is also important to emphasize the presence of numerous market anomalies such as the day-of-the-week effect, January effect, the effect of Holy Islam Days, and seasonal anomalies. The concept of irrational behaviour is also likely to explain the presence of numerous market bubbles of different size.
In conclusion, behavioural finance explains that underlying assumptions of the EMH do not hold in real life. In particular, investors’ behaviour cannot be fully rational due to individual traits of character, different perception of the level of acceptable risk, different expectations, current mood and fleeting emotions. The concept of instant distribution of information, which is the second important mechanism of market efficiency, appears to be too idealistic as well. Investors have different tools and opportunities for receiving and utilising information. Also, they may react to the same information in different ways and with different time lags, which makes the effect of information distribution suboptimal. These findings from behavioural finance also cast doubts on the validity of the third assumption of the EMH that asset prices follow a random walk