Wednesday, June 17, 2009

The Myth Of the Rational Market

Justin Fox, who has just published a book (positively reviewed by The Economist here) with a similar title, has written a piece that describes the travails of the efficient capital market hypothesis and the rational market postulation. It is written in his usual high standards and, of course, well analysed and highly readable. The piece is in Time and you can access it here. from here.

It's certainly a better read than what I wrote when touching upon similar matters recently.

Fox ends his piece thus:

The issue isn't whether financial markets are useful--they are--or whether the prices of stocks or bonds or collateralized debt obligations convey information--they do. There's also much to be said for the insight at the heart of efficient-market theory: markets are hard to outsmart. But when we give up second-guessing the market, we suspend our judgment. And without participants' exercising judgment--applying research, heeding a broker's opinion--markets stand no chance of ever getting prices right.

This summation is essentially a reminder that anyone that invests needs to put on his thinking cap and attempt to analyse the stock objectively.

I'm sceptical about Fox's suggestion that heeding a broker's opinion is a good idea without proper consideration since many people I know deal with brokers (read remisiers, which is a French word that means intermediary and, has a unique application to France, Malaysia and Singapore. How a French word found its way into the local stockmarket lexicon is, itself, an intriguing piece of research. There's an unsatisfactory description here) who merely utter the infamous words, Well, it's up to you.

It is, indeed, up to you as to where to put your hard-earned savings astutely or, to bovine-like, merely accept a "buy" recommendation without processing the "advice".

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