Sluggish Market & Ant Theory

[charliechan]

If the ants continue going to the two food piles in roughly proportional numbers. Irrespective of whether each individual ant returns to the same food pile, does this indicate an efficient market?

it indicates an aardvark is just round the corner and about to put an end to the ants fun!

he comes right on time you can almost set your watch by his foot prints.

what we really should be watching for though is the elephant who often tramples all over our aardvark friend - often unintentionally as he goes about his day to day business.

 

[SOCRATES]

Here is a perfectly appropriate Nursery Rhyme.....a bit of poetry late in the afternoon, you know....

Piggy on the railway,
picking up stones,
by comes the Engine,
and breaks Piggy's bones.
"Oh !" says the Piggy......"That's not fair".
"Why ?" says the Engine...."I don't care".

 

[SOCRATES]

it indicates an aardvark is just round the corner and about to put an end to the ants fun!

he comes right on time you can almost set your watch by his foot prints.

what we really should be watching for though is the elephant who often tramples all over our aardvark friend - often unintentionally as he goes about his day to day business.

And then suddenly the rains come, and drench everyone with a heavy shower of tears, except the clever creature in possession of a striped golf umbrella, who looks upon this misfortune impassively.

And now everything stops for tea, with buttered scones and jam.

 

[SOCRATES]

And I forgot to add...and some just get drenched,,,,,,,... whereas others succeed in being washed away, but it does not matter, as the proceedings continue the following day, same time same place, different ants...

 

[charliechan]

lol - delightful! both counts!

 

[SOCRATES]

OOOOO, charliechan, now he has gone and written an article in the knowledge lab with a whopping big hole in it larger than the ozone gap. I am not commenting and letting cats out of bags. Have a look. I do not expect you to comment either, as the consequences would, on the surface entail endless argument, but below the surface would involve endless aggravating brain picking ~ I am sure no accomplished technician woul endure. It is so entertaining and funny. Strongly recommended for a laugh.

 

[SOCRATES]

I have read it again... There are three whopping great holes in it, not one..... But no corks.

 

[ducati998]

Tuffty

Surely the definition of an inefficient market is one that allows some participants to make 'super normal profits' ( economists term ).

And there are enough examples of profits being made to support that at particular times the market is inefficient.

There are also degrees of inefficiency. You can't describe a market as efficient or inefficient as there will be a grey area or pockets of inefficiency. The arrival of ebay has made the second hand goods market much more efficient than it was before but there seems to be many 'professional dealers' still.

Absolutely. And that is the point. Inefficiency will exist, and as methodologies start to close the inefficiency, so that security will become efficient, and hence more "random" in it's fluctuations.

The ants had a PERFECTLY EFFICIENT market, viz. 2 plates of food. Their decisions as to which plate to visit thus was random.
However, when 1 plate was empty, eventually 100% of the ants visited the plate with the food.

The key for the investor, or trader, is via his analysis, to identify the inefficient phase, and buy or sell, and close out the position as it reaches efficiency.

Ducati, Your note re stop loss above makes no provision for a market that fluctuates between various degrees of efficiency.

Yes it does, maybe not clearly enough.
If you enter a position at the point of inefficiency, you will not require a stoploss.
If you continue to trade once "EFFICIENCY" is reached, you will require a stoploss, as random fluctuations will increase due to "new developments ( news ) which are random being priced in

mark_b_27

If the ants continue going to the two food piles in roughly proportional numbers. Irrespective of whether each individual ant returns to the same food pile, does this indicate an efficient market?

Yes it does.

 

[SOCRATES]

Well, so why should you or I or both of us explain anything publicly, I ask you, and this is part of the answer.

The other part is that whatever is explained will be argued with. And we have better things to do with our time and hard earned knowledge, haven't we ?

And the other part is, that if indeed we wish or we choose to whom to impart that knowledge, we can surely do it selectively, in private, don't you agree ?

And in the event that we do not want, for whatever reason to disclose or discuss or impart, we cannot be forced to do so, can we ?

Fortunately, all of this is abstract and is therefore protected from falling into the hands of the wrong people, unless you open your beak to speak.

The advantage that it is abstract is wonderful.

You can be mugged for your Rolex, like I was, but no one would mug you for what you know, even though the latter is infinately more valuable, but then again, many would not understand even if you were to explain it very clearly, and in ascending rafts of learning, with recaps, notes, questions asked and answered.

I have found this out, and, as consequence of my experience, am nowadays unwilling to teach anybody any more.

Better still, a whole anthill of ants could be recruited to detect what is efficient and what is not if we wanted to reduce this topic to abysmal levels of absolute absurdity.

 

[ducati998]

Dimbo & Dumbo

What are you two still doing on a thread related to the markets?
Haven't you got to go cash your giro's

Cheers d998

 

[SOCRATES]

And what belongs to the Giro may we ask ?
And if nothing belongs to it what is missing from it ?
Go on. First learn proper grammar, before being cheeky to your elders and betters.

 

[SOCRATES]

Dimbo & Dumbo

What are you two still doing on a thread related to the markets?
Haven't you got to go cash your giro's

Cheers d998

Recorded here to illustrate ducatti's grammatical blunder. Sheesh !....

 

[ducati998]

mark & Tuffty

Your posts are addressed back on page 3.
It got buried under all the drivel

cheers d998

 

[SOCRATES]

I am willing to give you a lesson ducatti.

This is a lesson in grammar only, not even a lesson in manners, that you also badly need.

When a word is abbreviated, such as the word gyroscope, gyrovane, or gyrocopter, it can be spelt gyro.

When something belongs to it, such as a nut or a bolt or screw, (whether it is missing or not, btw)
the abbreviated word carries an apostrophe s.

Examples:~ the Gyro's nut, the Gyro's bolt or the Gyro's screw.

So why do you murder the English Language by inserting the single apostrphe where it does not belong?

Or is it that you have attended school upside down all your life ?

Is this why you have learnt everything backwards I wonder ?

Is this why you give us all such tedious grief as well ?

No reply is required, just keep quiet, and do us all a favour.

 

[mark_b_27]

It can been argued that experiments in behavioural finance showing that market participants don’t always act rationally or that some participants make abnormal risk adjusted returns don’t necessarily disprove the EMH.

An efficient market can hold if the actions of irrational participants net each other out.
For example:
Suppose that given all available news price X should be $10 based on EMH.
Participant A comes along and decides that because the CEO has 11 letters in his name, price X should be $11 and goes long X.
However, at the same time, participant B comes along and decides that because there are 9 bananas in his fruit bowl this morning, price X should be $9 and goes short X.

The actions of the two irrational participants cancel each other out leaving the price unchanged at $10.

(a more cynical commentator might replace bananas with bolinger bands and numerology with fibonacci numbers).

Therefore the only assumption you need make for the EMH to hold is that the impact of irrational investors has a normal distribution with a mean of 0 (a somewhat easier assumption to make).

A similar argument can be applied to abnormal returns. For every trader with a large yacht and small Caribbean island, there are those who get burned so frequently and so severely that their broker keeps their dental records on file.
Does the fact that risk adjusted returns are not identical for each individual necessarily disprove EMH, if the mean risk adjusted return is in fact normal?

Something to consider.

 

[mark_b_27]

Thank you Socrates for helping us better understand the relevance of the ant study.

Our little ant by all accounts considers himself a highly rational little fellow.
He trots along to this particular area of the experiment and declares to all the other ants that there is absolutely no food to be found here.

Now we would all expect a rational ant to go and explore other areas of the experiment in search of that elusive pile of food and not waste his time by returning to an area already explored and discounted.

But what does this little fellow do?
He keeps on coming back to the very place where he says there is no food to be found.

Why is it so?

Obviously, by definition, I don't expect to get a rational answer to this little conundrum.

 

[Tuffty]

mark b 27, Good point regarding distribution of returns, some will have yachts some will be broke.

As a particant in the markets to make money I have to believe many with yachts aren't just lucky, but rather they have uncovered inefficiencies in the market that consistently make them super normal profits. If this isn't the case then I'm wasting my time.

 

[ducati998]

mark

It can been argued that experiments in behavioural finance showing that market participants don’t always act rationally or that some participants make abnormal risk adjusted returns don’t necessarily disprove the EMH.

I suppose you could, and you may well have a point if the cases were relatively isolated, and or random. But the evidence would seem to suggest otherwise.

Therefore the only assumption you need make for the EMH to hold is that the impact of irrational investors has a normal distribution with a mean of 0 (a somewhat easier assumption to make).

Fat tails however have been a fact of life in the markets since they began.

A similar argument can be applied to abnormal returns. For every trader with a large yacht and small Caribbean island, there are those who get burned so frequently and so severely that their broker keeps their dental records on file.

Again fat tails. For every yacht & island, the losers will number far more than one.

Does the fact that risk adjusted returns are not identical for each individual necessarily disprove EMH, if the mean risk adjusted return is in fact normal?

Can you expand on this?

Now we would all expect a rational ant to go and explore other areas of the experiment in search of that elusive pile of food and not waste his time by returning to an area already explored and discounted.

He keeps on coming back to the very place where he says there is no food to be found.

I think you misread what actually happened in the experiment.
Eventually, all the ants came to "understand" there was food only in one area.

However, when 1 plate was empty, eventually 100% of the ants visited the plate with the food

Tuffty

As a particant in the markets to make money I have to believe many with yachts aren't just lucky, but rather they have uncovered inefficiencies in the market that consistently make them super normal profits. If this isn't the case then I'm wasting my time.

The markets are intermittently efficient, and inefficient.
The key is to have a methodology that identifies when they are inefficient, and when they are efficient, and thus profit consistently.

cheers d998

 

[SOCRATES]

This is getting better by the minute, ducatti. Now the ants do not posess the faculties of mere insects, they are now learning to logically deduce and reason, to be rational and to "recognise". Marvellous !
One day you may even reveal that the ants have finally taken over the running of the world's financial markets and are responsibel for fluctuations in prices. I eagerly await your further pronouncements.

 

[charliechan]

shouldnt this be in the jokes forum?