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Comment by gonehome | Hacker News Reader

It's an old joke: An economist is walking down the street when he steps on a $100 bill lying on the ground. He spots it, but decides to keep walking and doesn't pick it up.

“After all,” he thinks to himself, “if that had really been a $100 bill, someone else would have picked it up already!”

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It took me until this moment to finally realize this joke relies on inefficient market to work. Consider: what if everyone in the joke's universe was a rational market actor? The $100 bill would lie there until it got consumed by rats or otherwise destroyed by natural events. For the economists' reasoning to work, there must exist some actors who don't reason this way, and instead pick up the bill on sight.

How does this translate to the efficient market hypothesis in general? Not sure, but if I were to dig down into how rational actors handle such situations, I'd expect to discover the math works out over continuous domain, and the joke is a paradox because we tend to think of money in discrete terms.

I think it's a good example of how rationality is a construct. We arbitrarily choose which rational framework makes the most sense in the situation and apply it.

Do you want to rely on the prior actor framework, or the react to what you see framework? That decision is not rational.

I like to view it this way: optimal decisions are not computable in practice. We never have enough data, nor enough time, nor is our brain particularly well-suited for this. We have no choice but to approximate, to use heuristics. This applies to both snap decisions and carefully applied formal models. The problem is, even the most rational of us sometimes forget they're just approximating, fudging both data and models at the edges, in order to get some result in finite time. They also forget to mention this.

The difference I see between what I wrote above and what you described as not rational choice of a framework is that, per my personal experience, it is possible to reconcile two conflicting seemingly rational frameworks. It just takes time to extend them past their edges until they meet. That is, extend each past the approximation cut-off point.

You've only created a new rational framework that you have irrationally chosen to use

It’s a little like the newcomb’s paradox. IMO the “rational” action is the one where given the circumstances you win. At least I’d one box in that problem every time given the way it works. In this example, it’s picking up the $100.

The efficient market hypothesis always confused me since it seems empirically false. Who is making the trades that make the market efficient in the first place? Plus people (even large groups of them) are often wrong. Startups and the massive value they can create are an example of that.

Markets are a prediction of predictions to some extent and people are far from agents that act only on hard numbers (and they’re often not wrong to do so). Markets are probably the best tool we’ve got for this, but they’re far from perfectly efficient.

I don't think I'd go this far.

In the EMH people do still trade, it's just that only those with new information trade profitably.

In the joke scenario, as a parallel, you just need the economist to model that there's a chance they are the first person to see the bill.

Then you have a game theory game, where your chance of being the first person to see the bill depends on what everyone else thinks their chance was to be the first person, and hence did or didn't pick up the bill.

Then there is some optimal mixed strategy where people try pick up the bill with a certain probability, and it all works out.

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