Corporate CEOs Reject the Efficient Market Hypothesis...
(But Want You to Believe It)
Kevin Drum.
And furthermore, American Cadbury's is better than Hershey's et. al....so this Brit chocolate I keep hearing about must be awesome indeed. Sadly, my one trip to the UK was a 1-evening stay in London, and we arrived just as a tube strike began and spent the whole time riding a bus and standing in line to do so...so I've never really been there.
(But Want You to Believe It)
Kevin Drum.
And furthermore, American Cadbury's is better than Hershey's et. al....so this Brit chocolate I keep hearing about must be awesome indeed. Sadly, my one trip to the UK was a 1-evening stay in London, and we arrived just as a tube strike began and spent the whole time riding a bus and standing in line to do so...so I've never really been there.
posted by Winston Smith at
3:47 PM
4 Comments:
You know, as much as I like to bash on capitalism, I don't think Drum's article did much to refute EMH.
I'm no economist [although my understanding of EMH is rooted in my one college macroeconomics class!), but I don't see Drum's point being very weighty. He asserts that, because companies universally declare their own value to be higher than their current closing share price, that they must reject the EMH. I presume that this is because he believes the EMH states that prices of traded assets as determined by the market are correctly established and based on all known information. Therefore, he would argue, if a company asserts that its value is higher than its closing share price, the company is denying that the market is correct about its pricing, which flies in the face of the EMH.
I wonder, however, if it's not the case that the EMH is referring specifically to individual tradable assets rather than a lump of assets grouped together, as would be the case in the purchase of an entire company.
Seems to me that it's fairly obvious that a group of assets brings with it advantages not present in any of the assets individually. For example: with all of the assets, one controls the company. With any single asset, one enjoys no such advantage.
So, when the market establishes a share price, I have to say I think it's an error to assume that the market's pricing of the company is understood through merely adding together the values of all of the individual shares. Perhaps a different mathematical formula is needed - one that takes into consideration the power accrued by each additional share held by an individual and the likely potential return on investment for said shareholder.
So, in short, rather than throwing out the EMH, it seems more reasonable to me to throw out the idea that valuation of a company should be done by simply adding up all of its share prices. We should probably substitute a more reasonable formula by which one might derive a company's net worth rather than reject the EMH (based off of this evidence, anyway).
Of course, as I said before, this in no way reflects an endorsement of the EMH, or even capitalism, on my behalf. Rather, based on the evidence provided by Drum, I think the proper conclusion is a reevaluation of how we evaluate the worth of companies based off of their share prices rather than a reevaluation of the EMH as a whole.
I think this is a better discussion of some of the issues surrounding EMH.
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&em
Righto...just to be clear, I don't think Drum is being completely serious here...
Right, there are plenty of other reasons to reject the EMH:
http://crookedtimber.org/2009/08/01/bookblogging-failure-of-the-emh/
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