Sunday, 26 August 2007

Efficient Markets

There is a theory, in the finance, known as "efficient market theory". The idea is that all the knowledge about market prices is already factored into the price, as the variety of people with money in the market between them would have fed in every piece of information. If an event happens then people will all react to the new information, so will under react and some will overreact but on average the market will be right. The efficient market theory states that it is not possible to consistently outperform the market by using any information that the market already knows, except through luck. So, if this is true, the only way to beat the market consistently is through luck alone, which will eventually run out. I'm mentioning this because I recently had a conversation with a friend who is involved in the financial markets and we were talking about the parallels between the bet exchange markets and the financial market and he mentioned efficient market theory. Anyone have any thoughts?


Anonymous said...

Hi mate just stumbled upon your blog from the sports Trader's blog. I have to argue that the betfair markets must not be efficient as I know people who consistantly make profits from trading on the markets and I am sure you are aware of people who do the same. I do not beleive they make these profits just by luck but rather by reacting to the market and finding inefficiencies.

Before the start of a race in the last 10 minutes you will see horses shortening in price and some going out and some doing both however nothing new has happened in terms of the actual horse (at least most of the time). So why do the prices change? That is the million dollar question - why they move and what causes them to move - in my mind there are many reasons and causes...which i am still trying to find though i do feel I have begun to find answers.


Anonymous said...

Late breaking information not fully reflected in the price,soccer team with flu,small squad with injuries to goalkeeper,midfield general horses behaving 'coltishly',start sweating,behaving fractiously in the stalls,fighting for their head 'in-running' we need to train ouselves to be alert to chance, so we can often capitolise before the price shrinks....Smokeyhalo

Richard said...

Great to hear from you both. I agree, I don't think the betfair markets are efficient, in fact I don't think there are many efficient markets at all. Thought I'd post up the question though, see if it got any debate going, stir things up a bit! Thanks for your comments.