COMMENT
ANNUAL CONFERENCE
Whatever Happened to
Efficient
Markets?
Rational Investing In An Irrational World
©DORIANO SOLINAS
to beat the market consistently, or create products that
do so, are heading for a fall. When this was the guiding
belief of markets in general, it was plain that problems
were looming. The failure of the regulators was not in
assuming that markets were effi cient. It was, rather, in
ignoring what should be the watchword for anybody
associated with fi nancial markets, that when returns are
exceptionally high so are the associated risks.
Effi cient markets require accurate information.
Whether it was because of the shortcomings of the
ratings agencies or insuffi cient disclosure by the
Hear From These Industry Leaders:
investment banks that designed and marketed the credit
Prof. Andrew Lo,
instruments that proved so toxic, it was clear that the
Massachusetts Institute of Technology
markets were operating on the basis of highly imperfect
information. Was this irrationality or, much more likely,
James Montier,
an enormous barrier to the effi cient operation of markets? Société Générale
When accurate information did begin to emerge,
markets responded quickly, and certainly rather more David Harding,
speedily than regulators. This was a response that Lord Winton Capital Management
Keynes, whose criticism of some aspects of fi nancial
markets the FSA quotes with approval, would have Verena Ross, FSA
recognised. When the facts available to them changed,
the markets changed their mind. This does not mean
Sanjeev Shah,
their previous position was irrational, merely
Fidelity International
inadequately informed.
One lesson from this crisis then is that we should not
Prof. Elroy Dimson,
attempt to re-invent economics and economic models,
London Business School
instead focus on improving them. The other is that we
should certainly not throw the effi cient market
118 June 2009
hypothesis out of the window. Instead, we should
Merchhant Taylors’ Hall
concentrate on ensuring that investors are always armed London EC2R 8JB
with the knowledge to make rational decisions. When
To find out more or to register visit
armed with such knowledge, they will.
www.cfauk.org/ac2009
David Smith’s website:
www.economicsuk.com
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 5
04 comment.indd 5 1/6/09 11:19:01Professional Investor Summer 09.7 7 4/6/09 15:40:43
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