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The Impossible Threesome

DevinKing
Posts: 206
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12/7/2011 9:53:45 PM
Posted: 5 years ago
--This is not to be confused with the impossible trinity regarding monetary policy.

--The components of this new 'trinity' are:
>Marginal Productivity Theory
>Efficient Market Hypothesis
>Reality(or at least one specific component thereof)

--These three cannot all be true(I suspect that reality isn't the culprit)

--Here it goes: Marginal productivity theory states that wages of a given worker are determined by the marginal productivity of said worker. The more productive you are, the more wealth you generate, the more you get paid.

http://en.wikipedia.org...

--The efficient market hypothesis asserts that market prices of any given stock will reflect all the known information about said stock since everyone has the same information about each stock and will bid up under priced stocks and bid down overpriced stocks as soon as they appear, thus driving the price back towards equilibrium. The main point of this is that: "In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made." -Quote straight out of everybody's favorite reference site. Cited below.

http://en.wikipedia.org...

--Finally, there is the fact that many mutual and hedge fund managers are among the highest paid people in the world.

http://www.ehow.com...

--These three items come together in a single climactic contradiction which is this: If markets are efficient (such that individuals cannot consistently best the market average), and the wages of any given individual solely reflect his/her productivity, then how do hedge fund managers get paid at all to pick investments? After all, their contribution must necessarily average out to zero if the efficient market hypothesis is to be believed.

--So, I challenge you to figure out which one is completely incorrect (or at least irrelevant to reality). Hint: There may be up to two answers.

--Or perhaps you think I am wrong in my analysis. In which case I urge you to inform me of this at once so that I may erase this terrible embarrassment of mine from the Internet.
After demonstrating his existence with complete certainty with the proposition "I think, therefore I am", Descartes walks into a bar, sitting next to a gorgeous priest. The priest asks Descartes, "Would you like a drink?" Descartes responds, "I think not," and then proceeds to vanish in a puff of illogic.
DevinKing
Posts: 206
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12/7/2011 10:07:20 PM
Posted: 5 years ago
At 12/7/2011 10:05:29 PM, Danielle wrote:
INB4 herp derp I love threesomes herp derp ;)

http://www.gta-expert.it...
After demonstrating his existence with complete certainty with the proposition "I think, therefore I am", Descartes walks into a bar, sitting next to a gorgeous priest. The priest asks Descartes, "Would you like a drink?" Descartes responds, "I think not," and then proceeds to vanish in a puff of illogic.
Homo_Sacer
Posts: 63
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12/7/2011 11:45:01 PM
Posted: 5 years ago
To my knowledge, no one, whether you look at mainstream or heterodox economics, believes that the efficient markets hypothesis is true. There was a publication which came out a few months ago, if I recall, which actually claimed to hammer the final nail into its coffin. If you search around a bit, you can find other pieces or theories heavily critical of the hypothesis.
Ore_Ele
Posts: 25,980
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12/8/2011 10:31:32 AM
Posted: 5 years ago
Marginal Productivity - Many companies pay empolyees the same rate, even though some employees do better than others. This is because should wage differences become known, it can cause conflict between employees and with managers, which can ulitmately harm a company. As such, for many jobs, it is just better to pay everyone (for the same job) the same amount (for example, making burgers, everyone might make $8.00 an hour, even though Sam is a little better than Frank).

Efficient Market - This is known to be false (not in allign with reality) because not everyone has total knowledge. There are far too many companies to have a total understanding on all of them in order to make an accurate pick. That is why there are investment companies that you give your money to and they do the research and investing.

This works because the amount that you'd lose because you can't do all the proper research is less than the amount that they charge you (all resources considered, not just money).
"Wanting Red Rhino Pill to have gender"
Wnope
Posts: 6,924
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12/8/2011 6:36:36 PM
Posted: 5 years ago
At 12/7/2011 9:53:45 PM, DevinKing wrote:
--This is not to be confused with the impossible trinity regarding monetary policy.

--The components of this new 'trinity' are:
>Marginal Productivity Theory
>Efficient Market Hypothesis
>Reality(or at least one specific component thereof)

--These three cannot all be true(I suspect that reality isn't the culprit)

--Here it goes: Marginal productivity theory states that wages of a given worker are determined by the marginal productivity of said worker. The more productive you are, the more wealth you generate, the more you get paid.

http://en.wikipedia.org...

--The efficient market hypothesis asserts that market prices of any given stock will reflect all the known information about said stock since everyone has the same information about each stock and will bid up under priced stocks and bid down overpriced stocks as soon as they appear, thus driving the price back towards equilibrium. The main point of this is that: "In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made." -Quote straight out of everybody's favorite reference site. Cited below.

http://en.wikipedia.org...

--Finally, there is the fact that many mutual and hedge fund managers are among the highest paid people in the world.

http://www.ehow.com...

--These three items come together in a single climactic contradiction which is this: If markets are efficient (such that individuals cannot consistently best the market average), and the wages of any given individual solely reflect his/her productivity, then how do hedge fund managers get paid at all to pick investments? After all, their contribution must necessarily average out to zero if the efficient market hypothesis is to be believed.

--So, I challenge you to figure out which one is completely incorrect (or at least irrelevant to reality). Hint: There may be up to two answers.

--Or perhaps you think I am wrong in my analysis. In which case I urge you to inform me of this at once so that I may erase this terrible embarrassment of mine from the Internet.

The rational actor assumption with no information differentials needed for the efficient market hypothesis is quite self-evidently not reality.

Only people like JimTimmy argue otherwise.

Your argument isn't very good. Let's say that the average retail employee gets a commission of 10% on whatever they sell.

Now, say hedge fund employees have a commission of 1%. One employee nets in a corporation that invested a hundred billion dollars into the hedge fund.

Right there, you've got tens of millions of dollars from a 1% commission.

Efficient Market hypothesis would predict that hedge fund owners would try to incentivize their employees to net bigger customers. It is "worth" the huge commission when you consider the enormous trade. Hedge fund managers who paid their employees a fixed wage would have less incentives for bigger clients.

Now is this FAIR? That's an entirely different question.