Index-fund growth created an informationally-inefficient price anomaly its own theory rejects

Evidence

However, there is one major exception to this pattern. Efficientmarket theory’s most important practical product was the index fund, and the growth of indexing created an anomaly from the viewpoint of the theory: the sharp increases in price that typically followed a stock’s inclusion in a major index, which is an essentially “informationless” event that should not affect prices. — Donald MacKenzie, An Engine, Not a Camera, 1152

Categorization

• XREF: Connects to critics’ argument that indexing itself is a performativity counter-case — the theory’s own flagship product violates the theory. Resonates with discussions of index inclusion effects in finance literature. — connects to: Financial-sector growth from asset inflation may have exhausted its own model. — Mark Blyth, Austerity: The History of a Dangerous…, 629; Index funds directly implemented financial economics’ efficient-markets claims — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 134; Index fund growth itself created the S&P 500 inclusion price anomaly. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 458 (+2 more)
• QUESTION: The effect has diminished ‘probably because of the extent to which it is being exploited’ — the exploitation mechanism here is worth examining more closely.

Broader Connections

• The efficient-markets hypothesis erased discussion of bubbles and speculation #complicates (0.75) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 749