Thursday, January 25, 2007

Publish or Profit?

Whenever someone tells you that he or she knows how to beat the market consistently, please feel free to raise an incredulous eyebrow. When that person follows up such a claim with an offer to show you how to do it... for a fee, make sure you've still got your wallet as you move a safe distance away.

The reason why is a concept I have touched on before: competitive markets are very efficient at driving down "abnormal" profits.

The Unknown Professor agrees with me on this, and in this post he points out an interesting recent paper that is yet more evidence for the validity of the efficient markets hypothesis.

Colby Wright, the paper's author, wondered why a financial economics researcher who thinks he's found a legitimate exploitable anomaly would tell anyone about his discovery instead of simply keeping the information to himself and taking full advantage of the profit opportunity. Wright hypothesized that researchers without established track records and with fewer published papers would be more likely to write about market anomalies than those researchers with strong reputations and long publishing careers, because writing about an anomaly would help a newer researcher establish their reputation (and the veteran researcher would rather keep the opportunity to himself). The evidence, according to Wright, bears this out.

For more detail, see the post at Financial Rounds, or read the original paper.


Dikkii said...

The evidence just keeps stacking up in favour of the EMH.

It just annoys me whenever I read advertisements for market trading techniques that simply have no evidence behind them. The problem is that people are simply not financially literate.

What's worse is that financial institutions have a vested interest in denying the mountain of evidence for the EMH.

Things would be so much simpler for investors if they only had fees to compare investment options *sighs*.

SleepyOreo said...

I am a student at FSU and I had Mr. Wright last semester, brilliant professor and yes, I do agree with everything you've said.

Einzige said...

Thanks very much for the comment, Sleepyoreo.