alt Hacker NewsThis seems to be a case of a feedback loop creating emergent behavior.
Let's say almost everyone believed in the Efficient Market Hypothesis (EMH). Then, trading would decrease significantly, since most people would think that stocks are already fairly priced. That means the few people who trade would move the market significantly, based on whatever idiosyncratic value-theories they had.
But then the EMH believers would see wild moves in the market and stop believing in EMH. They would start trading more to gain profits.
And as more traders participated, the market would behave more and more like the EMH were true. Eventually, the market would stabilize. Prices wouldn't swing so much. This would increase the number of EMH believers.
It would be interesting to survey belief in EMH among traders. If my model is correct, the percentage of EMH believers should be roughly constant, or at least oscillate around some optimum value.
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> since most people would think that stocks are already fairly priced
Like the classic economist joke where they ignore a $100 bill on the ground: "It can't be real. If it were, somebody else would have already picked it up."
What you seem to be missing is that people don't solely derive value estimates based on the opinions of others. There are business fundamentals which can lead to one or more value estimates under different assumptions. If you don't do your own calculations, you may still read calculations from other people and reach a conclusion as to whether the true value of the stock is higher or lower than the market price.
EMH is about the tendency of the market to be efficient over time. It is purely of academic interest to dream up hypothetical scenarios where everyone is equally rational and informed, etc. There are degrees of efficiency and information, and it's useful to talk about this to try to understand how real markets work and can be made to work better.
Sounds a bit like the Adaptive Markets Hypothesis. In it there’s constant “evolution” between different trading strategies that become more or less efficient over time.
So here, Phase 1 would be a market dominated by EMH believers who passively invest. In phase 2, speculative “noisy” traders start to exploit this landscape to profit. In phase 3 there’s a crisis or period of high volatility. The old complacent EMH strategies suffer losses and become extinct. Then no doubt in phase 4 the market moves to some new equilibrium with new strategies dominant!
So in this AMH theory what you describe is a natural process of evolution.