Whither EMH?


Matthew Yglesias sometimes says things that make you scratch your head…especially when outside of his philosophy specialty (when inside, it’s often a typo that makes you scratch your head). Today, he takes what probably amounts to a snide jab at the efficient markets hypothesis:

Felix Salmon has a long post reproducing many charts from a Fannie Mae document demonstrating that the American romance with homeownership is far from over. Apparently 70 percent of the public believes that buying a home is a safe investment, almost as high as the number (74) who think a savings account is safe, and way more than the number (50) who think “buying government or corporate bonds” is safe. I’d be interested to know what efficient markets theory has to say about widespread and persistent misperceptions about this kind of thing.

I’m kind of confused by two things. First, savings accounts are safe, and in the long term, so is homeownership. Even in the housing “bust”, the real housing-specific pain was endured in specific markets. But my confusion is not really the point.

The point is, the efficient markets hypothesis has nothing to say about what people answer in surveys…and what people answer in surveys often has little to do with what people actually do with their money.

For example, according to the statistic, roughly 26% of people in the United States are drug dealers. Why? Because drug dealers are the largest constituency which hoards currency. If this isn’t true, then those 26% of people either answered the survey in a confusing manner, or were being contrarian simply for the sake of it — they probably have their money in a checking account right now.

Another example, are the 50% of Americans that think government bonds are unsafe shorting government debt? Probably not. As a rule of thumb, shorting sovereign debt is generally a not the best idea. Especially when the country can borrow in their own currency, and float their debt. Quite ironically, their investment accounts likely contain both government AND corporate debt. Especially if someone else manages them.

The point is, there is little real cost to answering these surveys in any way you want. So unless these people are taking their principal to wallet en masse, they have very little to say for or against the EMH.

If they in fact did, then I’m sure that market prices would relevantly reflect that information.

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