Re: Efficient markets and incomplete knowledge
Chris Cooper (chris@quote.com)
Sun, 21 Dec 1997 17:49:37 -0800
At 07:28 PM 12/21/97 -0500, Sasha wrote:
>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.
>
Something like this already occurs in the financial markets.
You can buy bonds with the coupon intact, or you can strip the
coupon from the bond and buy just the pieces. Similarly, there
is a large market in exotic swaps and derivatives, some of which
are customized to match the characteristics that a particular
buyer wishes to address.
You should also realize that sometimes people bet not because
they have "better knowledge" but simply to hedge their positions
from unfavorable circumstances which they cannot predict well.
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Chris Cooper | Financial Market Data on the Internet
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