Adam Ozimek is an associate at an economics consulting firm, where he does a variety of tasks on a variety of projects in a variety of fields, mostly related in one way or another to economics.
His opinions expressed at this blog are his own and do not reflect the views of anyone but himself, and all the other usual blogging caveats apply.
He can be reached at adam dot r dot ozimek at gmail dot com
Modeled Behavior 
18 comments
Comments feed for this article
Monday ~ January 25th, 2010 at 4:07 pm
dave rothman
Hi Adam,
I found your site through an instapundit link and was interested in your numerous links and comments on efficient market theory (EMT). I think you and the other commentators are over-analyzing the concept and making it more rigid than the proponents argue. I’m basing my analysis on Malkiel’s “A Random Walk Down Wall Street.”
Maximum Likelihood Estimator (MLE) is the statistically most accurate prediction of future outcome. For example if you flip a coin, the MLE for the outcome is 1/2 heads and 1/2 tails. If you roll a pair of dice, the MLE for the outcome is 7. In these cases, we have perfect knowledge of the system and can calculate the odds of each outcome. This same approach can be easily applied to continuous probability distributions. With some caveats, MLE can also be applied to empirical data when we don’t have true knowledge of the system we are examining.
EMT states that for a naive investor, the current price of the stock is the MLE of its future price. PERIOD.
Will these prices go up and down? Of course. Are some stocks undervalued? Of course. Are some stocks overvalued? Of course. If you have more knowledge about a company, its competitors, its markets and significant trends, can you more accurately predict its likely future price? Again, of course.
EMT does not state that knowledgable insiders won’t do better than throwing darts. It does state that rate at which insider information propagates through the market is so fast that the by the time the naive investor finds out about a trend, the current price already reflects the sophisticated investor’s knowledge of the expected trend (Malkiel goes over this in some detail in his book). By trying to follow the market trends, the naive non-EMT investor is actually doing worse than pure chance (he is literally buying high and selling low).
Can an individual investor do better than EMT? Sure. Benjamin Graham’s value investors like Warren Buffett will usually outperform EMT investments like Vanguard. You can do the same analysis as Berkshire and reap the same rewards, but it demands a lot of work. In practice, most mutual fund managers are not Buffett’s league, and they perform no better than throwing darts (and often much worse).
For EMT to work, a significant fraction (perhaps 5 to 10%) of the people buying and selling in the stock market must be working hard to acquire stocks that will gain in value and shed those that will decline. There will never be a shortage of these hard working investors since they will reap a significantly larger reward than the EMT investors. The beauty of EMT is that you can achieve 80% of the return of the knowledgable investors who spend thousands of hours in research and analysis per year for 3 or 4 hours of work balancing your portfolio each year. I fully understand the hatred directed at EMT by brokers, mutual fund managers, and investment counselors since if it is correct, they are entirely useless parasites on investors. EMT investors gain by removing emotion, decision making under stress, trading fees and active management fees while consistently performing in the 80th percentile of mutual funds.
As a long term EMT investor (over 25 years), I am sure that you, or some other fund manager can outperform an index fund (Benjamin Grahan, Warren Buffett, and Peter Lynch all did so). Further, if you are able to outperform index funds, you should be lavishly rewarded for hard work you put in and the wealth you create. For me EMT yields the highest return on investment for the time I devote to it.
Saturday ~ December 4th, 2010 at 10:14 pm
palamur
Hey, saw your post on meth and Bovett’s op-ed in the Times. Thought I’d share my own take on it from the Georgetown Policy Institute: http://gppireview.wordpress.com/2010/12/01/restrictions-on-supply-wont-solve-the-meth-problem/
Glad to hear others seeing the conflict of reason in this situation…
Wednesday ~ February 16th, 2011 at 12:02 am
Chicken, antibiotic-resistant bacteria, and regulatory independence — My Blog
[…] After my post Monday on aspartame’s wild and wacky path from pharmaceutical-company lab to beverage sweetener for millions of people, I got into a back-and-forth on Twitter with star progressive bloggers Matt Yglesias and Adam Ozimek. […]
Wednesday ~ February 16th, 2011 at 12:52 am
OPISO » Chicken, antibiotic-resistant bacteria, and regulatory independence
[…] After my post Monday on aspartame’s wild and wacky path from pharmaceutical-company lab to beverage sweetener for millions of people, I got into a back-and-forth on Twitter with star progressive bloggers Matt Yglesias and Adam Ozimek. […]
Wednesday ~ February 23rd, 2011 at 4:24 pm
A Conversation on “Buying Power”: How the Wal-Mart Monopsony Damages Wages and Competition « floodingupeconomics
[…] This is a continuation of a previous post, springing from a conversation I had with another blogger. […]
Wednesday ~ February 23rd, 2011 at 4:30 pm
floodingupeconomics
Hey Adam,
I responded to our previous conversation on Wal-Mart. I’ve addressed each of your points in detail:
Here is the link to the discussion:
I think I was a little clearer in what I’m trying to get at as well.
Thursday ~ February 24th, 2011 at 10:12 am
Adam Ozimek
Great. I’ll take a look and get around to a reply when I get the chance. Looking forward to reading it.
Monday ~ February 28th, 2011 at 6:45 pm
Chris
Hey Adam,
Saw your tweet about getting Koch money for occupational licensing research (I assume it was yours). What about getting money for Race-to-the-Top-style challenges for local governments to remove onerous licensing requirements? If I were them, that’s the sort of thing I’d love to sponsor.
Tuesday ~ March 15th, 2011 at 4:41 pm
My podcast with Ha-Joon Chang
[…] people have been asking me for it, and now here it is. For his vigilance I thank Adam Ozimek. Be The First to Comment Cancel […]
Monday ~ March 21st, 2011 at 11:37 am
david Stocker
There are a few grammatical errors in your LIFO artical
older then optimal should be older than optimal
there’s should be there are
their should be they are or they’re
Sorry. Learned publications should engage proper grammar.
I follow your premise and generally agree with your conclusions. But, you only address the rate over time of rise in teacher income. And seem to imply that eventually teachers get up with lawyers and doctors. In equating incomes for comparison, you do not remind the reader that teachers pay is low in the USA compared to other industrialized nations and far lower than the income levels attained by doctors and lawyers over a career.
Thursday ~ June 2nd, 2011 at 2:48 am
Jim Kainz
The “secret” $600 trillion Derivatives Market which most Americans have never heard of presents an opportunity to pay off the National Debt without cuts to Medicare benefits. A small 0.5% transfer fee when these billion dollar contracts execute would raise over a half trillion dollars yearly in addition to any other deficit reductions we take. See How to Pay Off the National Debt by Kainz on amazon or barnesandnoble.com.
Saturday ~ October 15th, 2011 at 11:53 am
Where did service members killed in Iraq come from? | You Study Politics, Right?
[…] map that I produced this morning of the home cities of US service members killed in Iraq. Thanks to Adam Ozimek’s Stata geocoder and Hadley Wickham’s ggplot2 package for R, this took a grand total of 14 […]
Wednesday ~ May 30th, 2012 at 4:09 pm
What Critics Get Wrong About Creative Cities « 60spunk
[…] headline “Richard Florida is Wrong About Creative Cities.” The post, written by Adam Ozimek of the Modeled Behavior blog, reviews University of California Berkeley […]
Saturday ~ March 16th, 2013 at 6:05 am
test site
hello there and thank you for your information – I’ve definitely picked up something new from right here. I did however expertise a few technical issues using this website, as I experienced to reload the website a lot of times previous to I could get it to load properly. I had been wondering if your web host is OK? Not that I’m complaining, but slow loading instances times will often affect your placement in google and could damage your high quality score if advertising and marketing with Adwords. Anyway I’m adding this RSS to my e-mail and could look out for much more of your respective interesting content. Make sure you update this again soon..
Sunday ~ September 28th, 2014 at 4:24 pm
ugg triple bailey button
http://www.tottonhealthcentre.co.uk/red/black-ugg-boots-sale.html black ugg boots sale
Saturday ~ October 18th, 2014 at 5:51 am
Tyrone
You have made some decent points there. I checked on the
web for more information about the issue and found most individuals will go alomg with your views on this website.
Saturday ~ February 18th, 2017 at 6:12 pm
Cool Smart
You suck
Saturday ~ February 18th, 2017 at 8:28 pm
Jim Kainz
Adam,
If you would like a free copy of my book One Word Lasting Solutions please write me at jamesfkainz@yahoo.com. It deals with economic issues and proposed solutions:
Issue Solution
National Debt Derivatives
Climate Change Photosynthesis
Education Laboratories
Income Inequality Raises
Addiction to Foreign Oil Biofuels
Excessive Imprisonment Restitution
Poverty and Homelessness Usufruct
Campaign Financing SuperPAC
Excessive Business Tax rates Reductions
Middle East Wars Isolationism
Jim Kainz