Yesterday I attended a talk by Ed Thorpe. Ed not only wrote the highly influential book “Beat the Dealer” where card counting for blackjack was first popularized but he also did work which anticipated the Black-Scholes model of options pricing (and in fact was trading using the basic formula before the formula was even written down) and has been part of one of the earliest hedge funds which had annualized returns of around 30 percent over nearly thirty years.
\nIn his talk yesterday, Ed discussed how the efficient market hypothesis is wrong via numerous examples. The efficient market hypothesis asserts that stock prices are determined by a discounting process such that they equal the discounted value (present value) of expected future cash flows. Whenever you hear a talk about the efficient market hypoethsis (including Ed’s today) you always hear that part of the rational which leads towards this hypothesis is that prices reflect all known information. Now whenever I hear this, I feel like I want to crawl up into a ball and cry because I have a hard time connecting this statement with the information I am familiar with (Shannon et. al.) and also what it means to have “all” information. What in the world is “all” information? Do I need to know the wavefunction of everyone envolved? Sheesh. No wonder why traders like to give efficient market hypothesizers a bad time.<\/p>\n","protected":false},"excerpt":{"rendered":"
Yesterday I attended a talk by Ed Thorpe. Ed not only wrote the highly influential book “Beat the Dealer” where card counting for blackjack was first popularized but he also did work which anticipated the Black-Scholes model of options pricing (and in fact was trading using the basic formula before the formula was even written … <\/p>\n