The market’s taking a beating lately, and we’re not talking here about investment returns. Rather, the theory that market prices offer valuable information is on the defensive…again.
The latest assault came over the weekend in Paul Krugman’s New York Times Magazine article “How Did Economists Get It So Wrong?” Among the various indictments in the story is the charge that the efficient market hypothesis (EMH) is a principal cause of the economic ills that afflict the U.S.
Attacking EMH has become a popular sport recently, which is to say more popular than usual. Some of these attacks are exaggerated, others are misleading and some are just plain wrong, especially when it comes to interpreting (and often dismissing) EMH as it relates to investing. We’ve written about such issues regularly over the years and tackle the subject in more detail in our upcoming Dynamic Asset Allocation: Modern Portfolio Theory Updated For The Smart Investor, which will be published in February by Bloomberg Press. Meantime, let’s focus on one point in Krugman’s story regarding the management of the economy.