2
$\begingroup$

My layman understanding of the Efficient Market Hypothesis is that there is so much brain power focused on the maximization of profit in the marketplace, that the market will find the best solution both in the short and in the long term.

The particular instance of "Tragedy of the Commons" I have in mind is global warming, for which there is a fair amount of scientific consensus that it will disturb our civilization to an extent that does not guarantee that markets will continue existing as usual (stable governments being somewhat important for markets).

So here is my question: It seems that market players are not investing in ensuring the effects of global warming are minimized (i.e. market players are not ensuring the continuing existence of a market place). Does this mean that the Efficient Market Hypothesis is a model that does not describe our actual reality? If that is the case, how is one supposed to know when the Efficient Market Hypothesis is a good model?

A side question: Is this whole "exploiting the commons before someone else exploits them, irrespective of the fact that we are all doomed without the commons" more closely described by a Prisoner's Dilemma? But if that is the case, would you not expect the intelligent efficient actors in the marketplace to decide to work together to save themselves?

My education is not in economics so maybe my question is not well defined. My hope is that even if this is the case, an explanation of why the question is not well defined would be useful on its own.

$\endgroup$
  • 2
    $\begingroup$ EMH is about asset prices, not what you say, at least according to Wikipedia. So a simple solution to your conundrum is that correct future price of Earth is going to be zero at one point. $\endgroup$ – Fizz Apr 13 at 1:57
  • 1
    $\begingroup$ As for the other stuff, i.e. game theory and the tragedy of commons, you should ask that separately if you're still confused about it. There are a lot of good readings there about that, e.g. mdpi.com/2071-1050/4/8/1776/pdf $\endgroup$ – Fizz Apr 13 at 9:50
4
$\begingroup$

Your description of the Efficient Market Hypothesis (EMH) is not correct.

The EMH simply states that asset prices fully reflect all publicly-available information. It does not make the wild claim that:

the market will find the best solution both in the short and in the long term.


You write:

It seems that market players are not investing in ensuring the effects of global warming are minimized (i.e. market players are not ensuring the continuing existence of a market place). Does this mean that the Efficient Market Hypothesis is a model that does not describe our actual reality?

Market players do not invest with the goal of minimizing the effects of global warming. Instead, their goal is to maximize their returns.

To the extent that their interests and those of society's (or the world's) are not aligned, we have a problem of externalities. But this says nothing whatsoever about the EMH.


Example. At a horse-racing track, individuals place bets with the goal of maximizing their winnings. They do not place bets with the goal of raising the horses' welfare or of sustaining the horse-racing business. Their goal may not align with that of the horses or the business owner. But this says nothing whatsoever about the EMH.

(What the EMH would say in this example is that the bets reflect the expected performances of the horses. The bets do not say anything about the welfare of the horses of the viability of the horse-racing business.)

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.