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This is going to be a quick one talking about the hunt for the elusive insider-information. Well not really insider information but what investors and social media junkies like me might identify as insider or privy information but it really isn't. Hopefully there will be a twist of behavioral economics to boot.
Recently Dr. Eugene Fama has been under fire for flaws in the Efficient Market Hypothesis (EMH) he fathered years ago. It's been defended as a model to explain how markets work since the 1970's. In a nut shell, and for the average investor, EMH states that asset prices (like stocks) always incorporate the latest available information. Rational expectations is another big part of this theory. It can understood as outcomes that systematically don't differ from what people expected them to be. So the working example, very simply stated, is that if news breaks about a stock and the general population of investors thinks the stock will go up then it will. That interest creates an increase in demand for the stock and with a fixed or limited supply drives the share prices up. Dr. Fama states that this is just a model, a way to explain what's going on in financial markets. It isn't the truth otherwise he'd call it the truth and not a model. I agree with him here and his views about EMH so I decided to throw in a little extra food for thought. Something the interwebs have been showing me.
I believe that with the advent of social media that markets are becoming more and more efficient. Gone are the days were, for the most part, people could get the inside scoop on something and reap the ridiculous rewards that information arbitrage once offered. There are thousands of Twitter users like myself that Tweet about financial issuse and the latest news all the time. There's Facebook, LinkedIn, and even a social networking site called ifaLife for financial planners so the flow of information is constantly picking up more and more speed these days. EMH can't explain alot of things like insider trading and the momentum arguments but for practical investors it's pretty spot on.
Ok, so you talked about EMH and social media big deal what if I don't activley trade or have a portfolio? Well EMH and Rational Expectations can be applied to any kind of market. Remember a few years back when you couldn't find a Fisher-Price T.M.X. Tickle Me Elmo anywhere?! If you did it's price had sky-rocketed to the $500 price point in some places. For a plush giggling toy. Regardless of the motivations people perceived a value in it and the trampling lines at the toy stores can tell the rest of that story. If you are an internet marketer or an advertiser EMH follows you around all the time. Your spending time and resources on campaigns to bring about as much awareness of a brand as possible. You choose the venues on the internet, TV, and print media that you hope will give you the most exposure based on the best information you have at the time. Advertisers are looking for efficiency and to get the most eyes on an ad as possible (expectations).
If you take anything away from this take this: if you hear a hot new trend or tip on Twitter or MSNBC odds are it's already to late. Prices were adjusted and any exploitations were already had before you even refreshed your Twitter screen. You should be investing with a portfolio that your comfortable with, trading based on personal preference and your understanding of the most up to date and relevant information. If you're looking for more on Efficient Markets or Rational Expectations check out The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. Fox takes the position that people in general aren't rational, I would have to agree there, and because of that neither are financial markets. It's a neat chronological journey through history that really shed some great and easy to see light on the subject.