Marco Annunziata, chief Economist at UniCredit Group, has fired a couple of rounds at critics of efficient markets hypothesis, including Soc Gen’s GMO’s James Montier and the FT’s Gillian Tett.
He says simplistic attempts to throw EMH out of the window will not help improve our understanding of financial markets or strengthen institutions to limit the risk of future crisis.
The full piece (including a useful bibliography) can be found in the Long Room, but this summary provides a good overview of his argument.
To sum up: it is disingenuous to argue that universal and uncritical acceptance of the EMH was at the root of the crisis. The EMH has been challenged and criticized for the last thirty years, in a controversy that is still unresolved, and will not be resolved by the current crisis either. If anything, the crisis has been fuelled by behaviors that displayed a blatant disregard for the EMH. The latest bubble confirms that markets can be frighteningly efficient at amplifying periods of collective madness with disastrous consequence, and that the ideas of behavioral finance, bounded rationality and evolutionary psychology among others are extremely relevant to the analysis of financial markets.
But the EMH’s basic underlying notion that if there are obvious opportunities to earn excess risk-adjusted returns people will flock to exploit them until they disappear is as reasonable and common-sense as anything put forward by the EMH critics. Systematically beating the market remains awfully hard, and the EMH remains an extremely useful working hypothesis. Augmenting it and improving it is extremely desirable, discarding it as hopelessly flawed and irrelevant would be just plain stupid.
Related link:
The Dead Parrot of Finance – Long Room
Promote one who welcomes the death of EMH – FT Alphaville