MEGAN MCARDLE ASKS: “HOW CAN MARKETS BE EFFICIENT IF PEOPLE ARE SUCH MORONS?”

MEGAN MCARDLE ASKS: “HOW CAN MARKETS BE EFFICIENT IF PEOPLE ARE SUCH MORONS?” Kids, I posted here on the theory of efficient markets in response to Annalisa’s comment that, “There appears to be a good deal of randomness as to which stocks do well and which decline.” Megan McArdle asks here why even very smart people with Ph.D’s can’t, on average, outperform a diversified index. She has a memorable answer: “For the same reason that you can’t beat the football spreads.” A qualification, however, is that traders do make a lot of money on Wall Street even though the trading opportunities disappear quickly, as I posted on here. McArdle expresses that qualification this way: When there is a trading opportunity, traders “rapidly bid down the arbitrage opportunity to zero.” I want to draw attention to McArdle’s final point: markets do not find an “Platonic ideal of a price.”