Efficient markets and incomplete knowledge

Alexander 'Sasha' Chislenko (sasha1@netcom.com)
Sun, 21 Dec 1997 19:28:30 -0500

A few thoughts for your comments.

On the market, different agents bet that their own knowledge of the situation
is better than their competitors'; the resulting price is a weighed average of the
bids. An efficient/rational system, by definition, is one that uses all its
knowledge in an optimal way. In this case, the optimal projection of the price
would probably arise if all traders assembled and put their fragments of
knowledge together (otherwise any dispute could be replaced by gambling).
So the market cannot be rational? Or maybe it can be fixed by the traders
betting on some particular aspects of the market - the ones they actually
claim to understand. For example, instead of having meteorologists and trade
analysts bet against each other based on their partial knowledge of the situation,
meteorologists could put forward statements like "I bet that the floods will not
destroy more than 5% of the crops this year", while the trade analysts will say
something like "I bet that if the floods do not happen at all, the government will
stockpile 10 million tons of the product". Then, everybody would put their bets
on what they know, without the risk of losing money from the reasons beyond
their competence, and the resulting prediction would not only be more balanced,
but will include a model of the expected market behavior.

I wonder if something like this has been tried or researched.

Alexander Chislenko <http://www.lucifer.com/~sasha/home.html>