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Particularly from systems analysis: the first kind of error in systems analysis is solving the wrong problem with the right methods.
I searched for information about errors of the first and second kind and came across a forum of doctors. What is extremely interesting is that the topics of this discussion, strange as it may seem, are very similar to ours, but the level is much higher. Just look at the title of one of the topics:
Robustness and heteroscedasticity, How to get rid of emissions?
And they write about blood loss! If you read about it, you'll realize that without MathLab, R or Statistica you won't be able to be a good doctor!
This is a classic example of a good idea being applied "head-on" and failing miserably. My opinion of portfolio theory (without regard to its application to specific markets) is somewhat different. Anyway, in the future I will try to create a appropriate thread where I will describe its essence and outline the scope of its applicability. In this topic it is offtop and I would not want to talk about it in a few words.
You're welcome. There was a purchase, and here and now you can relax :)
For me, the place of the efficient market is precisely delineated and the boundaries of applicability are clear. For ordinary citizens, the efficient market theory has translated into portfolio investment funds, where the buy-and-hold strategy's risk-return ratio is perfectly justified with practical evidence.
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The idea of the efficient market would have flourished to this day despite its obvious shortcomings, most polemically pointed out by Mandelbrot (1964) and Peters. But this theory does not work with the outliers that are becoming more and more frequent in the markets. What's your 97% for Najdak investors when the index fell from 5200 to 1700 around 2000. Or 2007. The RTS index from 2300 to 490. Do the math, especially when you consider leveraged buying. People didn't just lose money, they stayed in debt. And Najdak had been falling for a year! What a theory!
More about the "accidental" market http://blogs.wsj.com/market beat/2012/07/19/sawtooth-trading-hits-coke-ibm-mcdonalds-and-apple-shares/
If you just read the terms of an efficient market, it's all purely for very naive people. In a world where governments run the economy, there are very few transnational monopolies with sales that are above the GDP of small countries - we are talking about a competitive market. There is no such thing in principle. Even in the bazaar there is collusion. So: trend trading, filtering noise and making sure it doesn't spoil trends too much.
Incidentally, the existence of transnational corporations, state conglomerates and international interbank associations is a vivid refutation of the efficient market theory, with its "economically rational agents" who compete with each other. The theory implies that these economic giants simply could not have developed to such a size, yet they exist, and moreover produce the vast majority of the Earth's output.
Then there is what is known as the uniqueness of business replication. The "chip" of the company. This too does not fit into an efficient market, where demand breeds supply. There are companies whose demand for their products has little bearing on the volume of supply of their competitors. Take Apple' s products, for example. No matter how competitive the devices produced by all the others, people will still buy the products of this company just because it is Apple. And it's not so much about the brand.
Another example is McDonalds vs KFC. It would seem, what difference does it make where to have lunch (which brand has momentary preference)? For supporters of casual wandering, it will. On Nevsky Prospect, in St. Petersburg, they will be like drunken sailors staggering from one side of the street to the other, alternately choosing one fast-food restaurant after another. After all, there is really no difference between them in terms of location, quality of service, international quality standards, average cost of a meal and so on. However, this is not the case. Whenever you go to McDonalds on Nevsky, there will always be almost twice as many customers as there are across the street at the KFC. Apparently visitors know nothing about an efficient market and therefore behave "incorrectly", preferring half-empty halls to long queues.
I once suggested that funds are interested in the vitality of the efficient market theory. But that's a superficial opinion. I think the problem goes much deeper than that. It lies in the philosophy of the consumer society. The main thing is to form a demand, to which everything else adjusts: education, science, grants, the press, public opinion, Nobel prizes, profitable enterprises. Young people are educated on this idea. Finally, from a certain threshold, this whole machination begins to reproduce itself and grow like a cancer. The essence of the idea itself becomes unimportant, because its refutation would leave a huge number of different people without money. And there are fewer and fewer people to disprove such a promoted idea, their funding is falling.
The truth is not needed. If such a promoted idea contradicts practice - worse for practice, much more comfortable to live in an invented world.
This is not a theory but a hypothesis. Most investors, traders and researchers agree that even in liquid and technical instruments there is an average form of efficiency. That is, there is some opportunity to make money, but it is only for a select few with inside information (insider information). But it is legally prosecuted in most countries.
It turns out that it is people themselves who limit their earning power by taking an average form of efficiency as an axiom.
But I don't like this "axiom".