John Quiggin writes:
The strong version [of the efficient markets hypothesis], which gained some credence during the financial bubble era says that asset prices represent the best possible estimate taking account of all information, both public and private. It was this claim that lay behind the proposal for ‘terrorism futures’ put forward, and quickly abandoned a couple of years ago. It seems unlikely that strong-form EMH is going to be taken seriously in the foreseeable future, given the magnitude of asset pricing failures revealed by the crisis.
I have two comments:
1. It was my impression that under classical economic theory, the economy is always at a phase transition (by analogy to ice water): there’s said to be enough “water” (i.e., trading) that prices reflect a consensus, but there’s enough “ice” (i.e., new information entering the system) that it is rational for prices to move. I don’t know any of the theory beyond this, but I imagine that much of the debate must center on how large the fluctuations are in this phase transition. In may mathematical systems (although not ice water, I think), these fluctuations can be large.
2. A point that I always thought was under-emphasized is that the proposed terrorism futures markets were to be run by by convicted criminal John Poindexter–a guy who was actually involved in what were arguably terrorist activities (the project of secretly sending weapons to Iran in the 1980s). The defenders of the terrorism futures markets never seemed interested in this point; see, for example, the comments here. But to me this was a pretty serious issue: really we’re talking about an unrepentant criminal here. I’m not saying that terrorism futures are necessarily a bad idea, but I was highly skeptical of that particular implementation.
US Court of Appeal DC Circuit reversed Poindexter's conviction (292 U.S.App.D.C. 389, 60 USLW 2371, 34 Fed. R. Evid. Serv. 33). Essentially Congress granted Poindexter use immunity to compel his testimony, but then the IC indicted him anyway, largely on the basis of that same compelled testimony. Thus it's incorrect to label Poindexter a "convicted criminal" as his conviction was reversed. Of course one could say that his conviction was reversed on a "technicality," but if you want to play that game then Daniel Ellsberg, got off on a technicality. Moreover many who lie to Congress never get brought to justice. For example Robert McNamara lied to Congress by denying the deal JFK negotiated with Khrushchev.
The whole Iran-Contra affair was largely a policy fight between the executive and legislative branches. This is the essential substance of the matter. I don't think it's accurate to call a Poindexter a "terrorist" because he facilitated weapons shipments. After all Jimmy Carter explored the possibility of sending military aid to Iran to get the hostages back.
Exactly: Poindexter committed a crime and got off on a technicality. I accept that this is how the legal system works, still, it's acknowledged that he did it. Also, I'm not saying that he's necessarily a terrorist, just that he was involved in what were arguably terrorist activities. My point was that this is a pretty loaded background for someone who's trying to run a terrorism futures market.
"The whole Iran-Contra affair was largely a policy fight between the executive and legislative branches. "
Congress banned spending on something; the executive branch broke the law. It's not 'just politics', or 'just policy', Congress does have powers under the Constitution, although the right has pretty much denied that for a few decades (minus the Clinton years).
"This is the essential substance of the matter. I don't think it's accurate to call a Poindexter a "terrorist" because he facilitated weapons shipments. After all Jimmy Carter explored the possibility of sending military aid to Iran to get the hostages back."
(a) The Contras were terrorists; anybody who aided were aiding terrorists.
(b) Sending weapons to Iran was illegal, full stop.
His crime was essentially a political crime, and really does not bear on his fitness to run a futures market. Had he been involved in some kind of investor fraud or transgression of financial ethics, you would have a point.
The strongest (albeit inconclusive) argument I've seen against EMH is the equity premium anomaly. The EMH just seems to me impossible to realize because of regulatory constraints, which seem like a pretty permanent fixture.
With regard to your point 1, one of the biggest criticisms of efficient market theory is that the amount of volatility and trading volume appears to be far beyond what would be expected under market efficiency. Robert Shiller wrote in his 2003 JEP article, "From Efficient Markets to Behavioral Finance,":
An interesting book on the ramifications of this is "Beast on Wall Street: How Stock Volatility Devours Wealth", by University of California Irvine's Robert Haugen