> A second counterpoint against the EMH is that, if all information is already in prices, then why would anyone trade anything, since there’s no profits to be made.
It can also make sense to trade because:
- different people have different risk appetites/time preferences. (so young people trade with near-retirees.)
- you can get paid market-making fees for it.
The first often happens by accident; most retail traders don't know what "risk-adjusted return" or "Sharpe ratios" are, and when they buy something because the return looks good they're actually buying higher risk. If you think a specific tech stock is going to go up, you can put 100% of your portfolio into it - but you can also borrow more money from other people (assuming interest rates work out), put 200% of your portfolio into QQQ, and end up with a safer portfolio and the same return.
> A second counterpoint against the EMH is that, if all information is already in prices, then why would anyone trade anything, since there’s no profits to be made.
It can also make sense to trade because:
- different people have different risk appetites/time preferences. (so young people trade with near-retirees.)
- you can get paid market-making fees for it.
The first often happens by accident; most retail traders don't know what "risk-adjusted return" or "Sharpe ratios" are, and when they buy something because the return looks good they're actually buying higher risk. If you think a specific tech stock is going to go up, you can put 100% of your portfolio into it - but you can also borrow more money from other people (assuming interest rates work out), put 200% of your portfolio into QQQ, and end up with a safer portfolio and the same return.
Brilliant article, thank you!