With enough relevant information about a particular stock, there will be one choice which will yield the greatest profit, and this is what we’ll choose. Mainstream theories of finance, like those of the Chicago School, contend that each individual will make the most profitable, obvious rational choice. For example, this could mean that they’ll all hold their stocks for five years before deciding what to do with them. Additionally, they’re all thought to have the same time horizon, the point at which they re-evaluate their investment decisions. However, it’s not uncommon for a scientific theory to simplify its subjects for the sake of clarity. In The behavior of MarketsMandelbrot seems rather caustic in his assessment of the EMH. This is not what Mandelbrot has argued exists in markets, so I’m surprised to see his name associated with the EMH. I have interpreted the EMH as arguing that the markets follow a more or less Gaussian distribution, without long term memory. River networks are useful metaphors, but markets are a thing onto themselves, if rivers behaved like markets then we’d experience more turbulent waters, things like flash draughts and jumping water levels. To use the river dam analogy, our current investment dams are not sufficient to weather the actual storms that will hit. The (mis)behavior Of Markets In 25 Quotes.The Misbehavior Of Markets Key Idea #7: An Adequate Theory Of Real Markets Doesnt Measure Time With A Clock.
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