The Efficient Market Hypothesis

Tim Harford has a nice post at the FT and his own site about the Efficient Market Hypothesis:

Burton Malkiel, author of A Random Walk Down Wall Street, noted in 2003 that the January effect had become a Wall Street joke, “more likely to occur on the previous Thanksgiving”. Elroy Dimson, another EMH expert, documented the reversal of a major anomaly – a tendency for shares in small companies to outperform the market – after it became known.

This is a good opportunity to recommend Donald Mackenzie’s brilliant book “An Engine, Not a Camera” about the self-fulfilling (strongly performative) aspect of financial theory and writing. The best case study in the book is Mackenzie’s extensive study of the Black-Scholes-Merton model as ensuring its own conclusions, through markets complying with its predictions as soon as the model spread(but not before). FT Alphaville had a post in October arguing in the same philosophical lines based on Christopher Cole’s note on the “postmodern economy”. All terribly exciting stuff, especially given that I’m currently following social studies of finance courses with a heavy influence of Bruno Latour.