The “three perversities of investing” – shortfalls in the efficient markets hypothesis
Here is an interesting presentation from Paul Woolley, senior fellow at the London School of Economic and Political Science. He says: “I blame the academic theory of efficient markets for the successive crises we’ve had”
- The efficient markets hypothesis assumes that competition results in asset prices that reflect fair value and self-stabilizing capital markets, allowing no room for excess returns for intermediaries.
- But it does not not address what Woolley calls the “three perversities of investing”, momentum, short-termism, and risk-return inversion.
He says is an asset pricing model needs to recognize that investors delegate to agents, and these intermediaries have different degrees of competence and different objectives, leading to asset mispricing and “rent capture” by agents
The presentation, along with a fuller summary, is here: The Fallibility of Efficient Markets Theory