How do you think about the economic efficiency of the price mechanism across different types of markets? By that I mean, are Schrödinger markets less efficient because of market manipulation in favor of the traders who win those markets? Are other markets more efficient? I guess efficiency isn’t a term you really talk through here so maybe we need to define the term.
There are a few different ways of thinking about "economic efficiency": there's information efficiency which asks: are the prices reflective of available information? This is what the efficient market hypothesis is actually about (and basically equivalent of you can't beat the markets because they are reflective of al information). Separately, there's allocative efficiency, which asks: do resources flow to highest-valued use? There's also operational efficiency, which asks: is the market cheap to use, due to tight spreads and low cost of trade? The differences and conflation across these could be their own post!
What I was trying to detangle is the conflation between "accuracy" and informational efficiency. In a way, a reflexive market can still be perfectly efficient in the strict informational sense, with prices reflecting everything knowable. But they can be true partly because people believe them. George Soros is one of the main proponents of this reflexivity theory, where market prices and perceptions end up impacting market fundamentals. One of his most infamous trades was "breaking the pound" in 1992 (BGIE throwback!). The UK was committed to holding sterling above a fixed floor against the Deutschmark, and Soros bet that couldn't last. The selling pressure be brought upon the pound was itself part of what made the peg impossible to defend.
Coincidentally, I stumbled upon this post today: https://henrygladwyn.substack.com/p/contested-ground), where the author makes a close cousin of this argument but outside finance. He splits verifiable knowledge work (which can be coded) and contested work, like a warranty negotiation, where the answer only exists once people work it out through negotiation. That maps almost directly onto the discovery/reflexive line here: when there's no fact outside the process, value is made in the interaction (i.e., endogenous) rather than something that can be purely "discovered". This is something I had been planning on writing more about, thinking about broader implications for coordination
How do you think about the economic efficiency of the price mechanism across different types of markets? By that I mean, are Schrödinger markets less efficient because of market manipulation in favor of the traders who win those markets? Are other markets more efficient? I guess efficiency isn’t a term you really talk through here so maybe we need to define the term.
Thank you for the thoughtful question!
There are a few different ways of thinking about "economic efficiency": there's information efficiency which asks: are the prices reflective of available information? This is what the efficient market hypothesis is actually about (and basically equivalent of you can't beat the markets because they are reflective of al information). Separately, there's allocative efficiency, which asks: do resources flow to highest-valued use? There's also operational efficiency, which asks: is the market cheap to use, due to tight spreads and low cost of trade? The differences and conflation across these could be their own post!
What I was trying to detangle is the conflation between "accuracy" and informational efficiency. In a way, a reflexive market can still be perfectly efficient in the strict informational sense, with prices reflecting everything knowable. But they can be true partly because people believe them. George Soros is one of the main proponents of this reflexivity theory, where market prices and perceptions end up impacting market fundamentals. One of his most infamous trades was "breaking the pound" in 1992 (BGIE throwback!). The UK was committed to holding sterling above a fixed floor against the Deutschmark, and Soros bet that couldn't last. The selling pressure be brought upon the pound was itself part of what made the peg impossible to defend.
Coincidentally, I stumbled upon this post today: https://henrygladwyn.substack.com/p/contested-ground), where the author makes a close cousin of this argument but outside finance. He splits verifiable knowledge work (which can be coded) and contested work, like a warranty negotiation, where the answer only exists once people work it out through negotiation. That maps almost directly onto the discovery/reflexive line here: when there's no fact outside the process, value is made in the interaction (i.e., endogenous) rather than something that can be purely "discovered". This is something I had been planning on writing more about, thinking about broader implications for coordination