Re: Efficient markets and incomplete knowledge

Warrl kyree Tale'sedrin (
Tue, 23 Dec 1997 00:45:27 -0800

> From: "Alexander 'Sasha' Chislenko" <>

> 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.

I don't know about any formal studies, but in all areas of the
economy investors and investment managers are trying to get all
relevant information they can and appropriately use it in their

So I don't know if (to follow your example) any firm that does a lot
of investing in crop futures, actually employs meteorologists; but I
will guarantee that many of them read long-range weather forecasts
and have a pretty good idea just how accurate such forecasts have
been in the last few years.

All by impetus of the free market, without any government program to
"rationalize" anything.
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