LTCM’s collapse was read as vindication of the efficient-market hypothesis

Evidence

When I discussed the crisis of Long-Term Capital Management (LTCM) with interviewees, the same aspect of ambivalence was sometimes manifest. Because of the prominent role of finance theorists in LTCM, its crisis was embarrassing to the field, but the debacle could also be read as a vindication of market efficiency. The large, apparently safe arbitrage profits that LTCM had been making contradicted the efficient-market hypothesis, and thus there was a sense in which LTCM’s crisis resolved the contradiction by showing that those profits had not been as safe as they seemed. — Donald MacKenzie, An Engine, Not a Camera, 1120

Categorization

• SEED: This inverted reading of LTCM the collapse proving the theory could anchor an essay on how communities immunize theories against disconfirming evidence.
• XREF: connects to: LTCM’s near-collapse was commonly blamed on blind faith in financial models — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 152; Efficient-markets theorists treated the 2008 crash as confirming their doctrine — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 494; LTCM’s arbitrage required causal explanations, not just statistical patterns — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1302 (+3 more)

Broader Connections

• Fama claimed the efficient-markets hypothesis was confirmed by the 2008 crash. #corroborates (0.95) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 710
• Efficient-markets theorists treated the 2008 crash as confirming their doctrine #corroborates (0.90) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 494
• LTCM’s arbitrage required causal explanations, not just statistical patterns #complicates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1302
• Efficient market theory could not imagine internally-generated systemic crisis #complicates (0.70) — Mark Blyth, Austerity, 130
• LTCM’s real trading closely resembled finance theory’s ideal arbitrage #complicates (0.70) — Donald MacKenzie, An Engine, Not a Camera, 154