(When Markets Get Wild)
No less an authority than Paul Samuelson, the Nobel laureate in economics, who died in 2009, argued that markets are “micro-efficient” but “macro-inefficient.”
By that he meant that investors are good at quickly integrating new information about individual securities—but bad at sizing up geopolitical and macroeconomic developments that can affect entire categories of assets like stocks, bonds or commodities.
In a private letter later published by Robert Shiller, the Yale economist who eventually won a Nobel Prize, Samuelson defined macro-inefficiency as “long waves” of prices for broad baskets of securities “below and above…fundamental values.”
Shiller believes markets are micro-efficient but macro-inefficient because an individual security is discrete and affected by a fairly limited number of factors. Broader bundles of assets, like entire national stock markets, can be swayed by countless forces, making their value “more subjective,” he says.
He thinks macro-inefficiency can unfold not only in the long waves that Samuelson assumed but also in short bursts.
“There’s a narrative that big market moves are a leading indicator, and it’s a very fast-acting leading indicator,” Shiller says. “The human sympathetic nervous system evolved for us to jump to action in an emergency. Time is sped up. People drop what they’re doing and think, ‘I’ve got to handle this.’”
That urge is exactly what brokerage firms and trading apps play—and prey—on. And it’s what long-term investors must be on guard against.
