Black called markets efficient only within a factor of two of value.
Evidence
Black, indeed, came to express doubts even about the central intuition of orthodox financial economics: that modern capital markets were efficient, with prices in them incorporating all available price-relevant information. Efficiency held, he suggested, only in a diluted sense: ”… we might define an efficient market as one in which price is within a factor of 2 of value.” Black noted that this position was intermediate between that of Merton, who defended the efficient-market hypothesis, and that of the “behavioral” finance theorist Robert Shiller: “Deviations from efficiency seem more significant in my world than in Merton’s, but much less significant in my world than in Shiller’s.” (Black 1986, p. 533; see Merton 1987 and Shiller 1989) Viewed from a distance, however, the differences between Black, Scholes, and Merton diminished Black’s doubts about Merton’s derivation were not public and the common core of their arguments became more salient. — Donald MacKenzie, An Engine, Not a Camera, 604
Categorization
- CANDY: The founding co-creator of the canonical option formula defining market efficiency as ‘price within a factor of 2 of value’ is a quotable, surprising one-liner.
- SEED: A usable hook for an essay on how canonical finance’s founder himself doubted the efficiency doctrine the models institutionalized.
- XREF: connects to: Efficient-market theory declared mechanical selling cannot move prices. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 808
Broader Connections
- Efficient-market theory declared mechanical selling cannot move prices.
#complicates(0.85) — Donald MacKenzie, An Engine, Not a Camera, 808