Philip Coggan, a.k.a. The Economist‘s Buttonwood columnist, steers me to
a strange piece in the Financial Times today which attacks (without naming) Justin Fox’s book The Myth of the Rational Market.
I have explained in the past why it is odd to blame efficient markets theory for the malaise (basically, no one in the markets operates under its dictates; those who provoked the meltdown were not abiding by the construct, or even aware of its existence).
But the oddness goes beyond fingerpointing a creed that is clearly not followed out there. The author of the book does not blame the theory, which was rejected by the academic community decades ago. We now know that even the creator of the theory thinks it nuts to posit that his mathematical baby was the culprit, for the simple reason that it was never wholeheartedly adopted by professionals.
As Coggan points out, this misses the main thrust of those who argue that efficient market theory was in some sense responsible for the crisis. They’re saying that regulators and central bankers missed the many warnings signs of a bubble because they believed markets were efficient. And then there’s Robert Waldmann’s excellent corollary:
I think active traders have a schizophrenic attitude towards the efficient markets hypothesis. Obviously they fundamentally don’t accept it, yet they assume it is valid when designing hedging strategies or justifying their compensation schemes. It was switched off and on. The belief that comovements of CDS prices revealed the (assumed to be constant) correlation of latent variables which determined defaults (the Gaussian copula) was critical to the crisis. That belief relied on the EMH.
The author of the FT piece addresses neither of these issues in his essay. But that’s not my main problem with it. It’s that’s in the course of a 692-word piece that is largely about my book, he never mentions my name or the title of the book. Who would do such a thing? I mean, seriously, who?
(I actually bought the guy lunch a couple years ago, at a really nice restaurant. Maybe he got food poisoning or something.)