What is Big Think?  

We are Big Idea Hunters…

We live in a time of information abundance, which far too many of us see as information overload. With the sum total of human knowledge, past and present, at our fingertips, we’re faced with a crisis of attention: which ideas should we engage with, and why? Big Think is an evolving roadmap to the best thinking on the planet — the ideas that can help you think flexibly and act decisively in a multivariate world.

A word about Big Ideas and Themes — The architecture of Big Think

Big ideas are lenses for envisioning the future. Every article and video on bigthink.com and on our learning platforms is based on an emerging “big idea” that is significant, widely relevant, and actionable. We’re sifting the noise for the questions and insights that have the power to change all of our lives, for decades to come. For example, reverse-engineering is a big idea in that the concept is increasingly useful across multiple disciplines, from education to nanotechnology.

Themes are the seven broad umbrellas under which we organize the hundreds of big ideas that populate Big Think. They include New World Order, Earth and Beyond, 21st Century Living, Going Mental, Extreme Biology, Power and Influence, and Inventing the Future.

Big Think Features:

12,000+ Expert Videos

1

Browse videos featuring experts across a wide range of disciplines, from personal health to business leadership to neuroscience.

Watch videos

World Renowned Bloggers

2

Big Think’s contributors offer expert analysis of the big ideas behind the news.

Go to blogs

Big Think Edge

3

Big Think’s Edge learning platform for career mentorship and professional development provides engaging and actionable courses delivered by the people who are shaping our future.

Find out more
Close

Economic Jujitsu: the Efficient Market Model

June 14, 2013, 3:00 PM
Shutterstock_83328694

People tried for centuries to predict where asset prices would go, whether it was wheat or gold and eventually the stock market.  And eventually, sometime around the ‘60s, academics began to realize that you really couldn’t say what was going to happen tomorrow and that you had, most of the time, no better facility than just chance in saying whether a stock price would go up or down tomorrow.  

I like to say they turned that weakness into a strength in a sort of Jujitsu sort of way and said, “Okay, I’m going to make that a principle.  Nobody can say what’s going to happen tomorrow because markets are efficient."  That’s the core of the efficient market model which states all security prices today reflect all available information and only new information is going to change the price.  That's a slightly vague statement that’s saying, "you can’t really be smarter than the market because the market has really reflected all of its information in the price today."  And that’s the core of the efficient market model.  

And I think it is more or less true.  People can’t in the sort term say what’s going to happen to prices tomorrow, although there are obviously counter examples.  And it’s not an absolute law like Newton’s Law is, it’s just a sort of tendency.  And I don’t have a lot of problem with that.  I think the bigger mistake that people have made in the efficient market model is saying that stock prices diffuse like smoke. And everybody knows that, strictly speaking, that's not true, but nobody has a really shorthand better way of describing what stock prices do.  And so they rely on this simplified mathematics and if you think about smoke diffusing, it moves very slowly and smoothly.  A piece of smoke doesn’t suddenly jump from here to there.  It makes its way slowly there by diffusion.  

And stock prices do that some of the time, but occasionally, if you look through the last crisis or through the ’87 crash or through almost any couple of months on the stock market, individual stocks jump 10 percent or some piece of news comes out and the market drops 18 or 20 percent in an instant.  And that’s not diffusion, that’s a crash, that’s a jump, that’s something violent.  

In the efficient market model as traditionally interpreted, it doesn’t allow for those kinds of violent sorts of behavior.  And really, that violent behavior more or less happens a lot of the time.  So that’s one of the big flaws of the model.  And I think that people who work with the model know that it’s wrong.  It’s not like they’re really stupid and they think its gospel.  But at the same time, they don’t have a simple way of doing better. 

In Their Own Words is recorded in Big Think's studio.

Image courtesy of Shutterstock

 

Economic Jujitsu: the Effic...

Newsletter: Share: