Thursday, December 3, 2009

Look! There's a $20 U.S. Federal Reserve Note on the ground!

From The Efficiency of Silver Coins by The Incidental Economist:
There is a famous joke about economists: Two economists are walking to the beanie propeller hat shop. One says, "Look! There's a $20 U.S. Federal Reserve Note on the ground!" (remember, he's an economist). The other says, "Can't be. If that were true, someone would have already picked it up." They walk on, leaving the $20 bill on the ground.

The joke is about the efficiency of markets. In an efficient market opportunities to systematically make profits above the market average don't exist. Any news that suggests a profit opportunity is taken advantage of nearly instantly and the extra profit is arbitraged away. The $20 is gone. It can't be there. Don't bother looking for it. This is the efficient market hypothesis (EMH) in a nutshell.


The Arthurian said...

You sure that joke isn't about the wisdom of economists???

Thanks for the laugh. Good blog-title, too!

Charlie said...

It's certainly a comment on the wisdom of classical economics. :-)

Ryan Romanchuk said...

This is because the classical economist works inside an ERE framework.