Sumner with an interesting anti-bubble-theory thought at EconLib: (EMH is Efficient Market Hypothesis)

The EMH doesn’t do a good job of explaining the 1987 stock market crash, or the 2000-02 tech stock crash. It’s hard to find fundamentals that would justify such a dramatic shift in prices over a short period of time. (Actually much harder for the 1987 crash than the tech stock declines, which took considerably longer.) So how do I defend the EMH? Two points:

  1. The EMH is very useful to me in all sorts of ways. It’s also consistent with a lot of research on the wisdom of crowds, and basic economic ideas such as competitive rates of return in competitive markets with free entry. It’s got a lot going for it. Because of the EMH, I’ve invested in index funds, and also engaged in buy and hold of stocks (not day trading). I ignored Shiller’s 2011 comments on overvalued stocks. My 401k has done very well as a result. It also helped me during my research on the Great Depression, when I found that market responses to policy shocks were much more perceptive that expert opinion, even the expert opinion of Friedman and Schwartz.

  2. The EMH cannot explain certain puzzling facts. (Matthews right about that). And on these points we should just keep our mouths shut.