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Comment by mojuba | Hacker News Reader

My take on this is, economy depends on human decisions whereas "pure" physics does not. To predict stock values even for one major company, with the greatest possible certainty you'd have to take into account everything that goes through the minds of the entire world population. And even that wouldn't be 100% precise because there would be unexpected events, such as natural disasters, probably even harder to predict than human decisions.

For some reason the theoretical economics is, instead, trying hard to ignore the human factor and squeeze patterns out of what's happening in the economy, i.e. the system is viewed pretty much like an isolated thermodynamic one. From this perspective a human being is merely an automaton that buys and sells stuff, just like molecules in thermodynamics are just little thingies with a few simple physical properties. Except humans are obviously far more complicated than that!

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The efficient market hypothesis states the value of a stock is the expected future dividends given all public information (or all private information, if you prefer the strong form).

This is a good example of how academic economics think because on the one hand it is consistent with your claim that "you'd have to take into account everything that goes through the minds of the entire world population" and on the other hand it "ignores the human factor" in that the efficient market hypothesis assumes that emotion, mass psychology, etc. don't enter into stock markets.

I think economists actually ignore the "human factor" in the right way, in order to get some reasonable approximation of reality. The problem is that adding the human factor back in doesn't result in a mathematically elegant theory, just a more complicated model. So they are unable to progress in the same way as physics can.

So, more generalized: economics is more focused on how the system moves towards equilibrium, but mostly ignores how the point of equilibrium itself fluctuates in time?

If anything it focuses more on the latter. Moving towards equilibrium isn't actually a meaningful concept in most of economics, since equilibrium is just the technical term for what happens when everyone acts in their own interest (e.g. Nash equilibrium) and correctly anticipates other actions (which in almost all economics models, does not require learning).

> the efficient market hypothesis assumes that emotion, mass psychology, etc. don't enter into stock markets

Isn't mass psychology part of "public information"?? I know little about stock markets, but from the outside I would say that "how I think people will feel about a company" is pretty much what I would base my "bet" on whether a stock will go up or down.

no, according to the theory, "psychology" plays no role. People are assumed to have some information (signals) that inform them about the stock price. The efficient market hypothesis assumes that the stock price equals the expected value of discounted future dividends, conditional on all the signals of all the market participants (or conditional on all public signals, in the weak version).

It's quite different to how you describe you imagined the stock markets working. But I also believe it's a more accurate picture overall. Markets are pretty accurate at least with regard to individual stocks (see Robert Schiller's work for a non-mainstream but still reasonable theory of irrational exuberance, where all stocks in the market might be over/under-valued at a given time)

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