Ben Southwood recently directed me to an interesting post by Sam Atis:
In the mail, Sam Atis suggested that the basic idea of the Efficient Markets Hypothesis could also be transferred to other areas of life. Here is one of his examples:
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Thinking about which charities to donate to is long and difficult, and I’m probably not smart enough to do it right anyway. But GiveWell does a lot of research, so I should just donate to the charities they recommend as the most effective.
I find that the more efficient the market is, the less time I have to spend on tedious tasks like gathering information. For example, the grocery store market, while not perfectly competitive, is efficient enough that I don’t bother doing price comparisons. I rush through the store grabbing what looks good, assuming that the store wouldn’t find willing customers for the good if the price of an item went wild. In a sense, I’m driving the people who check the prices more carefully. I get ripped off every once in a while, but I’m willing to pay the price to save valuable time.
Cyber Monday is another good example. If I don’t know much about a product I’m buying online, I often go for the most popular version. The fact that a company’s product stands out greatly from its competitors doesn’t necessarily mean it’s better, but popularity is certainly valuable information, especially when combined with online reviews.
The development of the Internet has not only provided consumer reviews, but also improved the quality of consumer goods. Some small towns that are outside of the major metropolitan areas have quality restaurants that could not survive without the internet. In the past, when we were driving, we would stop at the least bad restaurant chain near a freeway exit. Now we’re scouring the internet for the highly rated Vietnamese eatery that’s maybe a few blocks down the freeway. Producing high quality is expensive, and companies can only recoup the cost if consumers have the information they need to make informed decisions.
Even in cases where market efficiency falls short of the theoretical ideal, a market can be efficient enough to provide significant benefits to consumers wishing to avoid time-consuming search costs. The EMH was never literally true; it was always an approximation of reality. However, over time, more and more product markets have become more like the relatively efficient financial markets.
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