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Comment by api | Hacker News Reader

If markets were perfectly efficient there would be no entrepreneurs.

To start a business of any kind is to hypothesize the existence of a market inefficiency, something the market is not currently doing that would make it more efficient. All business is in some sense arbitrage between state A, the market as it currently exists, and state B, the market with your business in it. A business succeeds if its hypothesis is correct and if it executes well.

Also there's this: https://arxiv.org/abs/1002.2284

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That's a different definition of efficient than efficient-market theory. The theory is about the efficiency of the value of assets in the market to new information. It isn't about the efficiency of the businesses in the market or the market overall. The stock market prices are efficient, not the stock market companies.

Efficient-market theory doesn't apply to startups because they aren't listed on the stock exchange. The theory doesn't apply to small number of investors like VCs. It definitely doesn't apply to the business of the startup, or to the reaction of the market to the startup. It does apply when the startup goes public.

Presumably that wouldn't be the case for any innovative companies, though. There might not be Richard Bransons storming into existing markets and dominating them, but there would still be Microsofts and Googles.

Why would anyone finance an innovative company if financing companies yourself was always less profitable in the longer term than passively investing (which is what efficient market hypothesis is about)?

In fact if the EMH was true, then all hope for financing innovative companies would come from delusional investors making the sub-optimal choice of investing there. How “efficient”.

But the market only has access to public companies. It wouldn't know about anything non-public, would it? And when a company went public, in a perfectly efficient market all the share prices would instantly rebalance to take that new company into account.

> It wouldn't know about anything non-public, would it?

Why? Then how would be all your stealth companies supposed to raise enough money in the first place? Or attract customers?

In practice most companies are publicly known as early as series A at least and remaining unnoticed for longer requires lots of effort that would definitely hamper the growth of such companies.

And the market definitely takes rising competitors, even private, into account when assessing the financial prospect of existing public companies.

Non-public companies don't advertise investment opportunities uniformly to the entire market of investors the way a public company does.

EMH is about markets factoring in all available information, not just “uniformly advertised investment opportunities”.

But not all information is available to the whole market. Otherwise fully private startups would also fall under it, as, well, the employees know the information, so it's technically "available".

That definition of EMH seems to be what's causing this idea that innovation in new companies is impossible, rather than the general idea that asset prices reflect available information. Some information is not available, and that won't be reflected in prices. That's all.

You're assuming that startups are more innovative than large companies, but this is only true because the market is not efficient. An "efficient" enterprise would perfectly invest in innovation.

???????

emh doesn't mean everyone knows everything, it means the price accurately reflects available information. if an innovation was believed to be world changing, it would be worth a lot, if the belief changes, the price changes.

"Belief" being the key word.

The economy is a faith-based construct. Prices aren't set by "information", but by faith in value - which is one of the easiest things in the world to lie about.

This isn't related. You're zooming way out to "how do we know anything, man?" This is far more specific a topic than that.

And there is one problem: "belief". Some people can walk through Xerox PARC and bet their company on 3-4 things they see. Others can own Xerox PARC and bet their company on 3-4 largely different things.

In EMH there is cooked in some notion of overall largely rational beliefs, and yet the shares trade hands from someone selling to someone buying - both of which feel they got a good deal worth making money from.

i mean, if you want to go all epistemological, sure, let me rephrase. each of us individual humans live in a specific world mapped on what we believe we know and our lived experience, and there is (at least) one unique world for each individual human. the price is a representative agent of a subset of the worlds that exist within the minds of the participants of the economy. as the mappings of reality upon the beliefs and experiences of the individual participants change, the price changes.

There would be entrepreneurs, they'd just be making no economic rents.

??? technology invention is not about "market inefficiency"...

It is if you factor in the fact that innovative companies need some kind of financing to begin with, and that if the EMH was true, then it would be irrational for any investor to fund them.

Nope. When conditions change in the world, that creates a gap in the market. Even if everything were perfectly efficient now there would still be a need for markets to change tomorrow

I mean, by the nature of entrepreneurs being humans and dying or simply quitting, the market would welcome new blood

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