Anyone who has lived through a market correction (the tariff announcements in early April this year being a recent example, though there have been far worse) should be able to see that market prices do not always accurately reflect even the consensus view of value (which itself can be wrong). As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possible that everything suddenly lost the same amount of value simultaneously.
To quote Richard Bookstaber, "The principal reason for intraday price movement is the demand for liquidity... the role of the market is to provide immediacy for liquidity demanders. ...market crises... are the times when liquidity and immediacy matter most. ...the defining characteristic is that time is more important than price. ...diversification strategies fail. Assets that are uncorrelated suddenly become highly correlated, and all positions go down together. The reason for the lack of diversification is that in a high-energy market, all assets in fact are the same.... What matters is who holds the assets." (from A Framework for Understanding Market Crises, 1999)
Was the market drop an accurate reflection of the value that would have been destroyed by those tariffs, discounted by the probability that they would have been enacted as drafted? Nobody knew then, and I maintain that nobody even knows now. That was not the calculation that was being made.
> As people are forced to de-lever, everything goes down at once, often by very similar amounts, even though it cannot be possible that everything suddenly lost the same amount of value simultaneously.
The price of something and the value of something were never expected to be the same. What's the value of food? If you have none you die, so the value is quite high, but the price is much lower than that because there are many competing suppliers.
And the price of a large class like investment securities can easily change all at once if there is a large shift in supply or demand.
Not disagreeing with you, but isn't that already obvious from the fact that economic activity happens in the first place?
If you buy 5 apples from me for $5 then two things must be true: 1. The value that those 5 apples have to you exceeds the value that $5 have to you, at least at this very moment. Otherwise you would hang on to your $5 instead. 2. The value that those 5 apples have to me is less than $5 have to me, otherwise I would hang on to the apples.
The price of those 5 apples at this moment may be $5 but that doesn't reflect the value they have to neither me nor you. It's not the avereage either, necesarily. The only thing we know is that the value of them to you is higher and to me is lower.
> The price of something and the value of something were never expected to be the same
While I agree with you (quite firmly: it’s a great starting point to put on the table to challenge orthodoxy in this space), and think you’re agreeing with the parent comment, it is a fundamental tenet of mainstream economics and the political arguments of neoliberal (aka current mainstream) policy that [price == (market averaged) value], or at the very least [price ~= value].
Another interesting line of argument is to explore things that are valuable that don’t typically get a price: for example household labour, or love and friendship (at least directly: I’m sure a Friedman acolyte would reduce all relationships to exchange and reframe gifts and acts of love as investments).
As an aside for the parent comment: thanks for sharing this, it’s one of the top category of comments/quotes I’ve seen on HN in being useful, insightful, and challenging of conventional understanding in a way that improves understanding and future prediction.
Note that in orthodox microeconomic theory, price is equal to the marginal value of the last exchanged unit. To use the above example of food:
> What's the value of food? If you have none you die, so the value is quit of high, but the price is much lower than that because there are many competing suppliers.
The first calories of the day, the ones that prevent you from dying, have a very high subjective value - but you pay them at the value of the 3000th calorie of the day, the extra drop of ketchup on your fries, which has a very little value.
And thus of course average value x volume is very different from (marginal value of last unit) x volume.
> While I agree with you (quite firmly: it’s a great starting point to put on the table to challenge orthodoxy in this space), and think you’re agreeing with the parent comment, it is a fundamental tenet of mainstream economics and the political arguments of neoliberal (aka current mainstream) policy that [price == (market averaged) value], or at the very least [price ~= value].
For mainstream economics, this is true in a very specific technical sense; all averages lose information, and the "market average" is a very particular form of average that doesn't behave the way most people think of an average behaving—particularly, it is not like a mean, the normal "average" that people think of, that is sensitive to changes in any individual values, it is somewhat like a median in that it is insensitive to changes in existing values that do not cross the "average"; e.g., if you take an existing market for a commodity with a given clearing price, and reduce, by any amount, the value of the commodity to any proper subset of sellers who would sell at the current market clearing price, the market clearing price does not change. The assessment of value across the market has decreased, but the output of the particular averaging function performed by the market has not.
It seems like Bookstaber argues not that it's liquidity demand over information change, but that it is both. The tariff announcements are actually a great example, because it was triggered by new information, and diversification still kind of worked (at least some government bonds gained value during the drop in other assets classes).
The main question, I suppose, is why correlations were so high after the tariff announcements:
- In some cases, the high correlations are probably due to the markets being directly affected by the announcements: both commodities and equity are affected, and they got more correlated, which makes sense.
- In some cases, the high correlations are probably due to liquidity demand rather than markets being directly affected by the announcements: we would not expect cryptocurrencies to be directly affected by US tariffs, but they ended up correlated with equity markets anyway. That's probably because people needed to sell off their cryptocurrency to cover equity losses.
Thus in this case, it's again probably a bit of both.
Sir this is just a casino. Stocks have nothing to do with the businesses right after they are issued. A business can opt to just never issue dividends (Hi Amazon). So the stock itself has 0 actual value. It does not generate cash. (Ok if the company goes belly up you will get a percentage of the carcass)
But we can all gamble on what it is worth!
So stockholders are like roulette pill holders. Everyone just bets on where the pill will fall. Few are luckier than others. Some smarter know whether the roullete is rigged and have better chances.
the hypothesis maintains that
stock prices reflect all relevant
information about the stock
This is a common description of the EMH. But every time I read it, I think: Does information really directly impact the price of a stock? How?
What if it takes 12 months of hard thinking to draw the right conclusion from the information? Are there many investors who go to such lengths? Are they all thinking at the same speed? And if not, what does that tell us about the EMH?
Google released DeepDream in 2015. My feeling is that with enough thinking, one could have predicted where image generation is going in the next decade and that language generation would go a similar route. And that this will lead to a high demand in Nvidia's GPUs. But that thinking would not be instantly. It would take months or years.
Information that requires 12 months to figure out isn't information that's available now.
Say you want to know the 400 trillionth digit of pi. We have all the information needed right now to know how to compute it. But you don't know what the actual digit is yet. The information isn't available and won't be until you set your supercomputer on it for some number of months. Having the information necessary to derive other information isn't the same as having the derived information.
If there is some information about a future stock price that could theoretically be computed after months of work, that's still not information that currently exists, and therefore is not currently reflected in the price. If no investors go to the lengths to get that information, it'll continue to not affect the stock price. It's not violating EMH because it's not information that exists yet.
That definition would mean that smarter investors, who can think faster and further ahead, get information faster. And therefore have information now that others do not.
That seems to be directly the opposite of the common definition of the EMH, which emphasizes how the market reacts to new information. And not how it produces information. For example in TFA:
"the market rapidly responds to new information"
Wikipedia starts the "Theoretical background" with an example on how information becomes widely available to all investors, not how one fast smart thinker generates it:
Suppose that a piece of information about the value
of a stock (say, about a future merger) is widely
available to investors.
> What if it takes 12 months of hard thinking to draw the right conclusion from the information?
I think the idea behind EMH is that this probability is priced in, at any point in time. It just so happens that longer term probabilities are discounted as more volatile, thus impacting less the present price.
> What if it takes 12 months of hard thinking to draw the right conclusion from the information? Are there many investors who go to such lengths?
It's not required to be all of them. Suppose that it indeed isn't, but the ones who do that work for investment funds who control significant pools of money.
Now the investors in two or three of those places do the research and conclude that some company is about to start doing well and their share price is currently $50 but is about to be $150. So they start buying it, and keep buying it until it gets up near $150. Which happens pretty quickly because they control enough money to use up all of the short-term liquidity at the lower prices and the majority of the shares are held by people who aren't even paying attention and therefore don't try to sell when the price starts going up. Once the price gets to that point they don't buy any more because it's no longer selling at a discount.
Then the company actually starts doing well to the point that everyone can see it but the price hardly moves because it was already priced in.
That would mean that the p/e-ratio of a company would rise sharply long before the profits set in. And that rise would be called "mysterious" by the general public. And then only when the profits set in, the p/e would come down.
In systems thinking there’s the concept of “stocks” or “buffers”. Meaning that change of inputs into the systems first affect stocks/buffers before the outputs.
you're wrong about the mechanism - it's not that the thinking is the cause of the efficiency. It's the large number of participants all doing their own brand of thinking, and that the _average_ of all of those approaches the "correct" price. It requires the large number of participants because for such an average to approach "correct", errors within each participant's guesses cancel each other out.
And the immediacy comes from the large amount and speed of the transactions. It does not require that these participants sus out the correct value from information - they could've actually just guessed.
This seems to be a case of a feedback loop creating emergent behavior.
Let's say almost everyone believed in the Efficient Market Hypothesis (EMH). Then, trading would decrease significantly, since most people would think that stocks are already fairly priced. That means the few people who trade would move the market significantly, based on whatever idiosyncratic value-theories they had.
But then the EMH believers would see wild moves in the market and stop believing in EMH. They would start trading more to gain profits.
And as more traders participated, the market would behave more and more like the EMH were true. Eventually, the market would stabilize. Prices wouldn't swing so much. This would increase the number of EMH believers.
It would be interesting to survey belief in EMH among traders. If my model is correct, the percentage of EMH believers should be roughly constant, or at least oscillate around some optimum value.
Sounds a bit like the Adaptive Markets Hypothesis. In it there’s constant “evolution” between different trading strategies that become more or less efficient over time.
So here, Phase 1 would be a market dominated by EMH believers who passively invest. In phase 2, speculative “noisy” traders start to exploit this landscape to profit. In phase 3 there’s a crisis or period of high volatility. The old complacent EMH strategies suffer losses and become extinct. Then no doubt in phase 4 the market moves to some new equilibrium with new strategies dominant!
So in this AMH theory what you describe is a natural process of evolution.
> since most people would think that stocks are already fairly priced
Like the classic economist joke where they ignore a $100 bill on the ground: "It can't be real. If it were, somebody else would have already picked it up."
Information characterizing a company’s value isn’t the same thing as information indicating a company’s value. There can be a lot of analysis and model building in between. And different models can behave very differently, even if their prediction strength is similar.
Information publicly available doesn’t mean anyone can process it all. Every actor is operating off a different subset of information.
Lots of intentionally low information investors (inhabitants of indexed funds) demand stock or supply stock, pushing prices in directions unrelated to value changes, due to index list changes and rebalancing events.
Investors, of all magnitudes of wealth, have unending personal or private idiosyncratic reasons for the timing of many investments or sales, besides individual asset return optimization.
The value of a stock rises and falls as its absolute expected return rises and falls relative to the changing returns of the rest of the entire market of investment vehicles. Everything impacts everything.
All these shifts happen over varying time frames.
Almost all relevant market facts are time varying, often with turbulence and ambiguity.
The fast moving investors most influential in setting prices, must model the whole market’s 2nd order and even 3rd order reactions (by similar actors) due to feedback effects and dynamics.
Sudden market wide changes trigger waves of low analysis buying and selling. Compounded by the higher order risk this creates to leverage, annuity responsibikities, hedging, and many other amplifiers of behavior.
The efficient market hypothesis is an interesting and enlightening thought experiment. A reduced dimension toy/sim market.
Not a credible model.
Not even if every single participant was frantically and relentlessly re-valuing and re-balancing at the margins to a firehose of comprehensive market information.
I think what is unquestionable is that statistically, given available information, it is hard to make money against other market participants.
It is a form of informational efficiency, but it does not necessarily follow that prices are even statistically correct. The market can be irrational for longer than you can remain solvent.
Does the EMH state that prices will reflect on the price of a stock instantly? If not, I don’t think there’s a paradox. EMH would just mean it will eventually converge? I guess that makes it pretty toothless in practice then.
I feel like the stock market is pretty divorced from fundamentals at this point i.e. speculation makes it more like a Keynesian beauty contest (picking stocks you think other people will think are valuable).
Some institutional designs are more prone to Keynesian beauty contests than others.
It's instructive to compare "Crowdfunding" which took off with Kickstarter ~15 years ago, with "Equity Crowdfunding", which gets tried again and again, and has not a single success story to its name.
Kickstarter was made to fund artistic ventures, and for the first years, they were strict about only allowing that on their site. The idea was to reduce risk for e.g. people trying to bring their favorite band to the area for a concert.
On old Kickstarter, you only pledged to a project if YOU want the product/outcome for its own sake.
However, in "equity crowdfunding", where backers are tempted with a share in the profits of a venture, you should, if you are smart, try to ignore what YOU want. Your own wants are a source of error here: as a fan of the band, you're likely to overestimate its appeal. You should play the Keynesian beauty contest and try to guess what others want.
Kickstarter understood the difference very well. In the early years, they banned such things as "reseller's tiers". Some people would support e.g. a boardgame with pledging for five copies of the game, betting on its success and hoping to resell four of them. That brings the KBC factor in again, and Kickstarter thought that it would eventually lead to the site being flooded with the things everyone thought everyone else wanted, rather than the things they actually wanted.
There's a whole scam industry dedicated to exploiting the gap between what you want and what for its own sake and what you want because you think others want it: MLMs. MLM victims get tricked into a loop where they on one hand convince themselves that the product is great because they hope to sell it, and on the other convince themselves that the product will sell because it's great.
This is the truth. What drives the price up or down is speculation about whether the price will go up or down. There is only a very loose connection with actual company performance.
The EMH is a description of how the market behaves when a sufficiently large number of independent actors are looking for alpha. It is not a prescription of how the market should behave.
The conclusion is that with a sufficiently large number of actors in the market all seeking profits by trying to find misevaluation of stock prices, the excess profits of any individual actor will (assuming they all have access to the same information) converge to zero.
Its less a paradox and more a matter of game theory. Every investment firm which gives up trying to look for alpha (believing it is fruitless) means the remaining firms have more opportunities to find stocks with available information not reflected in the price. There's no paradox here: each individual actor is incentivized to participate in order to not miss out on that potential for excess profits, and the net effect is the EMH.
Yeah, I think the "paradox" is usually a problem for pundits and academics and not practitioners. Lots of people have experience finding and correcting market inefficiencies, usually getting paid for it.
My practical interpretation of the EMH is more that easily accessible, public information is already priced in. But non-obvious insights may not be simply because the volume of people trading on that information will be smaller.
> The Grossman-Stiglitz Paradox is a paradox introduced by Sanford J. Grossman and Joseph Stiglitz in a joint publication in American Economic Review in 1980[1] that argues perfectly informationally efficient markets are an impossibility since, if prices perfectly reflected available information, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse.[2]
So the more efficient markets are, the hard it will be to find "alpha" (returns), and so more people will stop trying. But as more people stop trying, markets will become more inefficient, in which case people can find alpha again, which encourages more participants.
Turnips and Carrots could be priced equally per tonne, and still be worth trading because although you might think all root vegetables are substitutable, it turns out you can't make carrot soup with Turnips.
It's always worth remembering trade involves use values as well. We don't only trade for asymmetric profit, and there are things like hedging which include a yield where both can acknowledge future risk, and price accordingly.
I'm probably ignorant of some magic economist reason why the words are fluid and don't mean what I think they mean: this always seems to be the case talking economics from the stuffed armchair.
Another take on this is that we can agree to facts and disagree to consequences. Same information, different conclusions.
I forget where I first heard it, but there's a joke about two economists walking down the street. One of them notices a $20 bill on the ground and points it out out, saying "Look, it's $20 just lying there on the sidewalk!" The other shakes his head and says "No, that can't be true; if it were, someone else would have picked it up already"
those insiders could be choosing an action that affects the markets, or thru inaction, affect the markets.
The current insider trading rules only prohibit actions, and does not prevent inaction.
As an example, you could imagine that an insider were going to sell their portfolio of company issued shares, but because of insider info they have about a current project that would give rise to a price hike, they may choose to sell _later_ (or not to sell at all). This means the liquidity of the market is now less, and thus, raises the price vs the counterfactual world where said insider _did_ sell. All without revealing any information about the actual insider project.
To quote Richard Bookstaber, "The principal reason for intraday price movement is the demand for liquidity... the role of the market is to provide immediacy for liquidity demanders. ...market crises... are the times when liquidity and immediacy matter most. ...the defining characteristic is that time is more important than price. ...diversification strategies fail. Assets that are uncorrelated suddenly become highly correlated, and all positions go down together. The reason for the lack of diversification is that in a high-energy market, all assets in fact are the same.... What matters is who holds the assets." (from A Framework for Understanding Market Crises, 1999)
Was the market drop an accurate reflection of the value that would have been destroyed by those tariffs, discounted by the probability that they would have been enacted as drafted? Nobody knew then, and I maintain that nobody even knows now. That was not the calculation that was being made.
The price of something and the value of something were never expected to be the same. What's the value of food? If you have none you die, so the value is quite high, but the price is much lower than that because there are many competing suppliers.
And the price of a large class like investment securities can easily change all at once if there is a large shift in supply or demand.
I would pay anything for air if I needed it, but I will gladly sell air in my yard for $1/m^3 because that air is worthless to me.
Is air priceless or worthless?
That is why price != value as most people think of it.
If you buy 5 apples from me for $5 then two things must be true: 1. The value that those 5 apples have to you exceeds the value that $5 have to you, at least at this very moment. Otherwise you would hang on to your $5 instead. 2. The value that those 5 apples have to me is less than $5 have to me, otherwise I would hang on to the apples.
The price of those 5 apples at this moment may be $5 but that doesn't reflect the value they have to neither me nor you. It's not the avereage either, necesarily. The only thing we know is that the value of them to you is higher and to me is lower.
While I agree with you (quite firmly: it’s a great starting point to put on the table to challenge orthodoxy in this space), and think you’re agreeing with the parent comment, it is a fundamental tenet of mainstream economics and the political arguments of neoliberal (aka current mainstream) policy that [price == (market averaged) value], or at the very least [price ~= value].
Another interesting line of argument is to explore things that are valuable that don’t typically get a price: for example household labour, or love and friendship (at least directly: I’m sure a Friedman acolyte would reduce all relationships to exchange and reframe gifts and acts of love as investments).
As an aside for the parent comment: thanks for sharing this, it’s one of the top category of comments/quotes I’ve seen on HN in being useful, insightful, and challenging of conventional understanding in a way that improves understanding and future prediction.
> What's the value of food? If you have none you die, so the value is quit of high, but the price is much lower than that because there are many competing suppliers.
The first calories of the day, the ones that prevent you from dying, have a very high subjective value - but you pay them at the value of the 3000th calorie of the day, the extra drop of ketchup on your fries, which has a very little value.
And thus of course average value x volume is very different from (marginal value of last unit) x volume.
For mainstream economics, this is true in a very specific technical sense; all averages lose information, and the "market average" is a very particular form of average that doesn't behave the way most people think of an average behaving—particularly, it is not like a mean, the normal "average" that people think of, that is sensitive to changes in any individual values, it is somewhat like a median in that it is insensitive to changes in existing values that do not cross the "average"; e.g., if you take an existing market for a commodity with a given clearing price, and reduce, by any amount, the value of the commodity to any proper subset of sellers who would sell at the current market clearing price, the market clearing price does not change. The assessment of value across the market has decreased, but the output of the particular averaging function performed by the market has not.
The main question, I suppose, is why correlations were so high after the tariff announcements:
- In some cases, the high correlations are probably due to the markets being directly affected by the announcements: both commodities and equity are affected, and they got more correlated, which makes sense.
- In some cases, the high correlations are probably due to liquidity demand rather than markets being directly affected by the announcements: we would not expect cryptocurrencies to be directly affected by US tariffs, but they ended up correlated with equity markets anyway. That's probably because people needed to sell off their cryptocurrency to cover equity losses.
Thus in this case, it's again probably a bit of both.
Great paper. Thanks for referencing.
But we can all gamble on what it is worth!
So stockholders are like roulette pill holders. Everyone just bets on where the pill will fall. Few are luckier than others. Some smarter know whether the roullete is rigged and have better chances.
What if it takes 12 months of hard thinking to draw the right conclusion from the information? Are there many investors who go to such lengths? Are they all thinking at the same speed? And if not, what does that tell us about the EMH?
Google released DeepDream in 2015. My feeling is that with enough thinking, one could have predicted where image generation is going in the next decade and that language generation would go a similar route. And that this will lead to a high demand in Nvidia's GPUs. But that thinking would not be instantly. It would take months or years.
Say you want to know the 400 trillionth digit of pi. We have all the information needed right now to know how to compute it. But you don't know what the actual digit is yet. The information isn't available and won't be until you set your supercomputer on it for some number of months. Having the information necessary to derive other information isn't the same as having the derived information.
If there is some information about a future stock price that could theoretically be computed after months of work, that's still not information that currently exists, and therefore is not currently reflected in the price. If no investors go to the lengths to get that information, it'll continue to not affect the stock price. It's not violating EMH because it's not information that exists yet.
That seems to be directly the opposite of the common definition of the EMH, which emphasizes how the market reacts to new information. And not how it produces information. For example in TFA:
"the market rapidly responds to new information"
Wikipedia starts the "Theoretical background" with an example on how information becomes widely available to all investors, not how one fast smart thinker generates it:
https://en.wikipedia.org/wiki/Efficient-market_hypothesisI think the idea behind EMH is that this probability is priced in, at any point in time. It just so happens that longer term probabilities are discounted as more volatile, thus impacting less the present price.
It's not required to be all of them. Suppose that it indeed isn't, but the ones who do that work for investment funds who control significant pools of money.
Now the investors in two or three of those places do the research and conclude that some company is about to start doing well and their share price is currently $50 but is about to be $150. So they start buying it, and keep buying it until it gets up near $150. Which happens pretty quickly because they control enough money to use up all of the short-term liquidity at the lower prices and the majority of the shares are held by people who aren't even paying attention and therefore don't try to sell when the price starts going up. Once the price gets to that point they don't buy any more because it's no longer selling at a discount.
Then the company actually starts doing well to the point that everyone can see it but the price hardly moves because it was already priced in.
That would mean that the p/e-ratio of a company would rise sharply long before the profits set in. And that rise would be called "mysterious" by the general public. And then only when the profits set in, the p/e would come down.
I can't see that in Nvidia for example:
https://www.macrotrends.net/stocks/charts/NVDA/nvidia/pe-rat...
The price roughly rose along the earnings. Even though the foundations for generative AI became clear in 2015.
And the immediacy comes from the large amount and speed of the transactions. It does not require that these participants sus out the correct value from information - they could've actually just guessed.
Let's say almost everyone believed in the Efficient Market Hypothesis (EMH). Then, trading would decrease significantly, since most people would think that stocks are already fairly priced. That means the few people who trade would move the market significantly, based on whatever idiosyncratic value-theories they had.
But then the EMH believers would see wild moves in the market and stop believing in EMH. They would start trading more to gain profits.
And as more traders participated, the market would behave more and more like the EMH were true. Eventually, the market would stabilize. Prices wouldn't swing so much. This would increase the number of EMH believers.
It would be interesting to survey belief in EMH among traders. If my model is correct, the percentage of EMH believers should be roughly constant, or at least oscillate around some optimum value.
So here, Phase 1 would be a market dominated by EMH believers who passively invest. In phase 2, speculative “noisy” traders start to exploit this landscape to profit. In phase 3 there’s a crisis or period of high volatility. The old complacent EMH strategies suffer losses and become extinct. Then no doubt in phase 4 the market moves to some new equilibrium with new strategies dominant!
So in this AMH theory what you describe is a natural process of evolution.
Like the classic economist joke where they ignore a $100 bill on the ground: "It can't be real. If it were, somebody else would have already picked it up."
Information publicly available doesn’t mean anyone can process it all. Every actor is operating off a different subset of information.
Lots of intentionally low information investors (inhabitants of indexed funds) demand stock or supply stock, pushing prices in directions unrelated to value changes, due to index list changes and rebalancing events.
Investors, of all magnitudes of wealth, have unending personal or private idiosyncratic reasons for the timing of many investments or sales, besides individual asset return optimization.
The value of a stock rises and falls as its absolute expected return rises and falls relative to the changing returns of the rest of the entire market of investment vehicles. Everything impacts everything.
All these shifts happen over varying time frames.
Almost all relevant market facts are time varying, often with turbulence and ambiguity.
The fast moving investors most influential in setting prices, must model the whole market’s 2nd order and even 3rd order reactions (by similar actors) due to feedback effects and dynamics.
Sudden market wide changes trigger waves of low analysis buying and selling. Compounded by the higher order risk this creates to leverage, annuity responsibikities, hedging, and many other amplifiers of behavior.
The efficient market hypothesis is an interesting and enlightening thought experiment. A reduced dimension toy/sim market.
Not a credible model.
Not even if every single participant was frantically and relentlessly re-valuing and re-balancing at the margins to a firehose of comprehensive market information.
It is a form of informational efficiency, but it does not necessarily follow that prices are even statistically correct. The market can be irrational for longer than you can remain solvent.
I feel like the stock market is pretty divorced from fundamentals at this point i.e. speculation makes it more like a Keynesian beauty contest (picking stocks you think other people will think are valuable).
https://en.m.wikipedia.org/wiki/Keynesian_beauty_contest
It's instructive to compare "Crowdfunding" which took off with Kickstarter ~15 years ago, with "Equity Crowdfunding", which gets tried again and again, and has not a single success story to its name.
Kickstarter was made to fund artistic ventures, and for the first years, they were strict about only allowing that on their site. The idea was to reduce risk for e.g. people trying to bring their favorite band to the area for a concert.
On old Kickstarter, you only pledged to a project if YOU want the product/outcome for its own sake.
However, in "equity crowdfunding", where backers are tempted with a share in the profits of a venture, you should, if you are smart, try to ignore what YOU want. Your own wants are a source of error here: as a fan of the band, you're likely to overestimate its appeal. You should play the Keynesian beauty contest and try to guess what others want.
Kickstarter understood the difference very well. In the early years, they banned such things as "reseller's tiers". Some people would support e.g. a boardgame with pledging for five copies of the game, betting on its success and hoping to resell four of them. That brings the KBC factor in again, and Kickstarter thought that it would eventually lead to the site being flooded with the things everyone thought everyone else wanted, rather than the things they actually wanted.
There's a whole scam industry dedicated to exploiting the gap between what you want and what for its own sake and what you want because you think others want it: MLMs. MLM victims get tricked into a loop where they on one hand convince themselves that the product is great because they hope to sell it, and on the other convince themselves that the product will sell because it's great.
The conclusion is that with a sufficiently large number of actors in the market all seeking profits by trying to find misevaluation of stock prices, the excess profits of any individual actor will (assuming they all have access to the same information) converge to zero.
Its less a paradox and more a matter of game theory. Every investment firm which gives up trying to look for alpha (believing it is fruitless) means the remaining firms have more opportunities to find stocks with available information not reflected in the price. There's no paradox here: each individual actor is incentivized to participate in order to not miss out on that potential for excess profits, and the net effect is the EMH.
> The Grossman-Stiglitz Paradox is a paradox introduced by Sanford J. Grossman and Joseph Stiglitz in a joint publication in American Economic Review in 1980[1] that argues perfectly informationally efficient markets are an impossibility since, if prices perfectly reflected available information, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse.[2]
* https://en.wikipedia.org/wiki/Grossman-Stiglitz_paradox
So the more efficient markets are, the hard it will be to find "alpha" (returns), and so more people will stop trying. But as more people stop trying, markets will become more inefficient, in which case people can find alpha again, which encourages more participants.
It's always worth remembering trade involves use values as well. We don't only trade for asymmetric profit, and there are things like hedging which include a yield where both can acknowledge future risk, and price accordingly.
I'm probably ignorant of some magic economist reason why the words are fluid and don't mean what I think they mean: this always seems to be the case talking economics from the stuffed armchair.
Another take on this is that we can agree to facts and disagree to consequences. Same information, different conclusions.
The current insider trading rules only prohibit actions, and does not prevent inaction.
As an example, you could imagine that an insider were going to sell their portfolio of company issued shares, but because of insider info they have about a current project that would give rise to a price hike, they may choose to sell _later_ (or not to sell at all). This means the liquidity of the market is now less, and thus, raises the price vs the counterfactual world where said insider _did_ sell. All without revealing any information about the actual insider project.