Investing: The Last Liberal Art 



And this takes us to the crux of the matter. If a complex adaptive system is, by definition, continuously adapting, it is impossible for any such system, including the stock market, ever to reach a state of perfect equilibrium. What does that mean for the market? It throws the classic theories of economic equilibrium into serious question. The standard equilibrium theory is rational, mechanistic, and efficient. It assumes that identical individual investors share rational expectations about stock prices and then efficiently discount that information into the market. It further assumes there are no profitable strategies available that are not already priced into the market.

The counterview from Santa Fe suggests the opposite: a market that is not rational, is organic rather than mechanistic, and is imperfectly efficient. It assumes the individual agents are, in fact, irrational and hence will misprice securities, creating the possibility for profitable strategies. In later chapters we will consider the underlying psychology that causes people to behave irrationally where money is concerned.

Investing: The Last Liberal Art (Columbia Business School Publishing) by Robert G Hagstrom

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