Efficient Financial Markets Aren’t Efficient

BERLIN, GERMANY - APRIL 11: The bitcoin website is shown on the computer of the proprietor of a shop selling vinyl records and that accepts bitcoins for payment on April 11, 2013 in Berlin, Germany.

Photo by Sean Gallup/Getty Images

As Scott Sumner argues the extreme instability of the price of Bitcoins should be understood as a confirmation of the efficient markets hypothesis (EMH) not a refutation of it. But that in turn is just another illustration of the extent to which the use of the English language word “efficient” as an economics term of art can get confusing.

After all, there’s nothing particularly efficient about the kind of wild gyrations that are often associated with efficient financial markets. There isn’t, as of yet, much of a Bitcoin economy. But if there were basing long-term investment decisions on these wacky market fluctuations would be a terrible idea. Efficient markets just exhibit a level of instability that’s highly undesirable from the standpoint of normal people trying to run a real economy.