Market actions based on efficient-market models can create anomalies those models cannot explain

Evidence

This book has, however, also emphasized that counterperformativity is possible: that practical action based on economic models can undermine the empirical validity of those models. One instance noted above is the way in which the development of index funds an expression of the efficient-market view that systematic success in stock picking is unlikely seems to have created an anomaly from the viewpoint of efficient-market theory: the increases in price that typically followed inclusion of a stock in a major index. However, by far the most significant possible instance of counterperformativity is the role of portfolio insurance (which was based, albeit loosely, on a Black-Scholes world, in other words a world in which the assumptions of the Black-Scholes-Merton model were valid) in exacerbating the 1987 crash and thus undermining the Black-Scholes world. — Donald MacKenzie, An Engine, Not a Camera, 1166

Categorization

• DEFINE: Defines counterperformativity and gives the book’s two central instances: index-fund inclusion effects and portfolio insurance in the 1987 crash.
• XREF: connects to: Efficient market theory could not imagine internally-generated systemic crisis — Mark Blyth, Austerity: The History of a Dangerous…, 130; Credit-risk regulation imports market-finance models developed for traded securities. — Ève Chiapello, Financialisation of Valuation, 60; Market efficiency fails once attention becomes scarce, requiring corrective intervention — Yves Citton, The Ecology of Attention, 177 (+15 more)

Broader Connections

• The Efficient Market Hypothesis resists empirical falsification through the protective shield of auxiliary hypotheses #expands (0.75) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 753