[T]he Efficient Markets Hypothesis [is] in contention for one of the strongest hypotheses in the whole of the social sciences.

Strictly speaking the EMH is false, but in spirit it is profoundly true. Besides, science concerns seeking the best hypothesis, and until a flawed hypothesis is replaced by a better hypothesis, criticism is of limited value.

Martin Sewell

Um … the criticism might not be useful to science, but knowing that the EMH is false is certainly useful to market participants.

The Kelly Rule for optimal bet sizing says to leverage your bet in geometric proportion to your confidence. So a small reduction in confidence means a big reduction in (optimal) leverage.

I could also wheedle about how obvious modifications of the EMH are more correct than strong EMH, but I won’t. My main thought on this quote is that Sewell has effectively redefined “truth” so that his viewpoint is unfalsifiable. (What example could I cite to demonstrate that EMH is not “profoundly true in spirit”?) On the other hand, it would be naive of me to think that esthetics and organa are not driving the engine of any kind of theory—be it economics, physics, or Foucault.

Anyway … despite the fervour of the abstract (from which I’m quoting), Martin Sewell’s History of the Efficient Markets Hypothesis is an informative read. 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s