I’m loath to disagree with Noah Smith, especially now that he’s soon to be Herr Doktor Professor, but in a very good post, he writes this about efficient markets (boldface mine):
Do we, in fact, see this? I am not sure we do. On one hand, index funds are becoming more popular, signifying greater public acceptance of the Efficient Markets Hypothesis. On the other hand, the recent recession probably decreased faith in rational-expectations models of the macroeconomy, both among economists and among the public at large.
I don’t think the Efficient Markets Hypothesis is why index funds are becoming more popular. Instead, I think there are three things at play here (and I write this as someone who has money in index funds):
1) User fees. Even if a particular broker manages to beat the market (and it happens), much of the profits will be eaten up by broker’s fees. You’re better off, over the long haul, putting your money in a low-fee index fund.
2) Bet-hedging against financial parasitism. More and more people are realizing that, even though they have to put their money somewhere (or multiple somewheres), when it comes to the stock market, the house always wins, and they’re not the house (e.g., the rise of high–frequency trading). Putting your money in an index fund is safe–you won’t do better than the market, but you won’t get fleeced either. Mind you, this has nothing to do with efficient markets: in fact, it’s predicated on the idea that most people will be intentionally deceived by a few. In essence, this is legalized fraud.
Admittedly, these two reasons reflect my neuroses: whenever someone says, “My broker recommends..”, I think, “So his broker is trying to dump shares of shit he got stuck with.” Just my thoughts.