[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

believe that their insights, rather than luck, are what has enabled them to beat
the market.
EFFICIENT MARKETS OR RANDOM NOISE?
While most economists agree there is little evidence that individuals can consistently
beat the market, even when they spend considerable money on information,
they disagree over how to interpret this finding. Some see it as evidence of the efficiency
of the market, as we have seen. But other economists view it as evidence of
nothing more than the market’s randomness. Those in the latter group point out
that large changes in stock market prices often seem to occur in the absence of any
“news” of sufficient magnitude to account for these changes. For example, there are
usually ten or fifteen days in the year when the stock market changes by more than
2 percent—a very large change for a single day—without any obvious news-related
explanation.
The famous economist John Maynard Keynes compared predictions of the stock
market to predictions of the winner of a beauty contest in which what one had to
decide was not who was most beautiful, but who the judges would think was the
most beautiful. If investors suddenly “lose confidence” in a particular stock or in
the whole stock market, or if they believe others are losing confidence, share prices
may fall dramatically.
20
15
STOCK PRICE
10
5
0
0
10 20 30 40 50 60
TIME (DAYS)
Figure 39.6
A COMPUTER-GENERATED
RANDOM WALK
The series plotted here can be thought of as the closing price for a stock over 60 consecutive
trading sessions. There is no predicting at the end of each day whether the
stock will close higher or lower in the next day.
884 ∂ CHAPTER 39 A STUDENT’S GUIDE TO INVESTING