Cat Beats Professional Investment Manager, But What's "Efficiency" Got To Do With It?

A blog about business and economics.
Jan. 14 2013 4:05 PM

Cat Beats Professional Investment Manager, But What's "Efficiency" Got To Do With It?

In yet another victory for the random walk theory of stock price movements, the Observer has managed to run an experiment in which a cat outperforms some professional investment managers. In terms of practical investment advice, though, the real killer is management fees. A cat works for cat food, and you can pick stocks randomly yourself for free. A professional is going to want to be compensate. And the rub here is that even though there actually is some evidence that some managers can beat the market, even in the best case scenario the returns are all recaptured in fees.

That said, I think one of the most curious aspects of finance theory is that this phenomenon has somehow come to be known as the "Efficient Markets Hypothesis." As economics, the EMH seems pretty solid to me. There's the cat, after all. But as rhetoric it's terribly misleading. Saying that the movements of asset prices are unpredictable and largely random is different from saying that the swings are efficient.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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