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business newsAre the Efficient Market Hypothesis and the Concept of Fundamental Value Dead?
By
James Kostohryz
Jul 28, 2010 8:40 am
The ubiquity of populist anti-intellectual financial narratives say much about the times we live in.
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In reflecting upon today’s financial zeitgeist, it’s interesting to analyze two widespread fads that are currently popular among media commentators. First, it’s become fashionable among commentators to defenestrate formerly prestigious theories such as the Efficient Markets Hypothesis (EMH) and their academic purveyors. Second, it’s today considered almost de rigueur for financial-markets commentators to pooh-pooh the relevance of fundamental valuation in stock-market investing.
Some commentaries, such as the recent well-written piece by Mr. David Waggoner entitled, Efficient Market Hypothesis' False Reign Over Financial Markets, have gone even further and suggested that the supposed failure of EMH and fundamental analysis has somehow vindicated and resuscitated technical analysis, a popular (almost folksy) method of financial analysis but one which had, for many years, been discredited within scientific circles.
In this article I’d like to broadly address some of the notions that have come to form an integral part of the ideological milieu that dominates today’s discussions and debates about finance.
Historical Dialectics and Our Financial Zeitgeist
Before analyzing the substance of competing arguments, I believe it could be helpful to gain consciousness of the historical moment in which we live. In terms of finance, the global crisis of 2008-2009 is the dominant historical fact of our age. This crisis has marked a before and an after -- a veritable turning point in financial history.
Prior to the 2008-2009 crisis, the EMH was the dominant theory of finance. Thus, from a simplistic dialectical point of view, it shouldn’t be surprising that the collapse of financial markets in the 2008-2009 period should have coincided with the collapse of the dominant financial ideology of the previous epoch.
Indeed, as Hegel might have predicted, it has today become universal “common knowledge” that the financial crisis of 2008-2009 exposed the “contradictions” of EMH, and as a result, the theory has become completely discredited in the popular mind. But today, rather than producing a Hegelian synthesis, the ideological consequence of the 2008-2009 crisis has been a sort of “Nietzschean Moment,” in which the tendency has been to violently purge all previous knowledge and its purveyors in favor of a resuscitation of the common sense of a simpler (more barbarian) age and a presumably more wiser “volk.”
No positions in stocks mentioned.
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