Daniel Gross, Me, and the Efficient Market Hypothesis

Daniel Gross is at Davos and writes:

I noticed a piece of gray paper on the floor. It looked like it might
be currency of some sort–certainly not a dollar, but perhaps Swiss
francs or something else. I started to bend over to pick it up, but
then I caught myself. This is the World Economic Forum. It is populated
by hundreds of economists and by thousands of business people schooled
in the tenets of economics. This is possibly the most rational,
profit-maximizing concentration of human capital in the world. These
are the actors who make up an efficient market. And of course adherents
to the efficient market hypothesis famously don't believe in the
concept of found money….

But I'm a
connoisseur of economic irrationality. And so I bent down and picked up
the paper. On one side, the grim visage of Queen Elizabeth. On the
other, Charles Darwin. It was a 10 pound note, worth about $16.25. Just
lying on the floor, unmolested by Nobel Prize-winning economists, CEOs
of Fortune 500 companies, and financial journalists.

Gross concludes the efficient markets hypothesis must be false.

The same thing happened to me once except I wasn't at Davos, I was walking in New York near Wall Street and I saw a green folded up note that looked to be money.  I too paused and thought of the old joke that if it was money someone would have picked it up already, but I picked it up anyway and took a closer look…..alas, it was a cleverly folded piece of paper designed to look like money when dropped on the sidewalk, although it was actually an advertisement.  Kudos to Eugene Fama, I thought on that day.

Perhaps our different experiences account for some of our differing economics views.

Hat tip to Ezra Klein.


Of course for the dollar not to be there someone has to pick it up. Why shouldn't it be you.

I've found a few tenners in my day.

Also when I was in grade school I found a guy's wallet with well over $100 in there. It just so happened I was ditching out on Catholic mass at the time, so I returned the wallet to the police station.

I didn't conclude anything about the EMH from that incident but I did conclude that, if there is a deity, it has an incredibly ironic and guilt-inducing ethos.

This does not demonstrate an inefficient market. I'm sure that ten pound note in Davos was dropped from a helicopter.

Efficient markets just means you can't make a living picking up money on the streets. Over 60+ years, I have probably found, gross of my own losses, what must be between US$100 and US$200 (helped by a find of NZ$80 on the street in Wellington).

Furthermore, all other things being equal, the larger the amount the shorter the time it will lay there before someone picks it up.

What is more disturbing to me is that due in part to childhood superstitions, and much to the disgust of my children, I will stoop to pick up cents, even though the amount gained must exceed the opportunity cost of my time.

Poor Daniel Gross. By trying to prove his argument that the EMH does not hold, he picked up the bill ... and made the EMH hold! That must be blowing his mind.

Improbable events sometimes occur? Do the statisticians know about this?

Oh, come on...
Has nobody noticed the exclamation mark in the title of Gross' piece? I'm sure he doesn't really believe it disproves EMH. And as Michael B points out, Gross is causing the efficient market to work. The note on the floor does serve to prove that EMH is not instantaneous; this depends on the number of participants and the information available.

The money on the floor analogy only goes so far. If you're going to attack EMH based on the last few years, it's probably on a basis of people imagining £10 on the floor and thinking they've picked them up, rather than not picking actual money.

And finally, @JSK, is picking up £10 really a waste of time? Depends on the opportunity cost. I can't imagine that when walking along the streets of Davos you could lose £10 of time by picking up £10. It'll be a few seconds at most, and if you're with someone you can costlessly carry on a conversation anyway, which could be possibly improved as you stroll off discussing EMH...

The fake folded $20 I found in the subway one day was an ad for a titty bar. I wonder how efficient it would have been to pay a girl there for a lap dance with one ?

'Gross' underappreciation of opportunity cost. For me or you, it's almost always worth bending down to pick up and inspect a £10 note. For the Davos man, less so.

Once I found $40 on the street -- two green $20 bills that were folded together.

Really nice find, that.

Did anyone do the math?

It takes maybe 5 seconds to pick up a coin, look at it, and slip it into your pocket. Even if it's just a 5 cent coin that is 1 cent per second, 60 cents/minute, $36.00 per hour (tax free!)

If it's a $5 note, that's $3600/hour. A 10 pound note is about $15000/hour. $30 million/year (tax free, say equivalent to $50 million/year salary). About the salary of a top level movie star or CEO.

In a perfectly working efficient market, no valid bill is left on the street. In a bubble, people collect garbage mistakenly thinking it's money. In a bust, people throw out money from their pockets in the delusion it's toxic waste.

English £10 notes aren't grey, they're brown.

it's all fiat money anyway, so even if it is *REAL* money, it's just a delay in the punchline, LOL - carry on

The opportunity cost here is actually bigger than the time it costs to pick up the 10 pound note; I doubt you can pay anywhere in Davos with British banknotes, so you would either need to go to an exchange agent (which takes more time and involves transaction costs) or you would have to keep the note around somewhere until your next visit to the UK.
Hardly worth the trouble unless you were actually British.

Every column by Daniel Gross proves the adage that a little learning is a dangerous thing. They all follow the same method: reporting a simplistic anecdotal datum, showing how that relates to his pre-existing beliefs, concluding that his pre-existing beliefs were indeed correct, and sneering at anyone who might think otherwise.

C - Thanks for the link to the Wikipedia article. I have read it and understand the joke, but I think the joke misrepresents EMH because EMH doesn't say you can't find money, it just says don't count on it.

I'm just looking for someone to affirm my thinking is correct or that it's not correct, and here's why...

Unfortunately, I think a lot of pop economists take the joke to seriously as actual proof against EMH.

Matthew C. - Can you give me the names of some of these traders so I can generate excess returns on my capital? I'll pay them a fair sum of the excess profits they generate.

I get kind of stuck trying to figure out how the real world EMH issues apply to the currency-on-the-floor joke.

1) If I was in the ballroom and you told me that you had heard there was a $20 bill on the floor of the cafeteria 10 minutes away, I probably wouldn't make the walk. I assume Gross wouldn't either.

2) Grant that sometimes there is currency to be found on the ground. What exactly does that tell us about the EMH?

3) Isn't the point of the actual EMH not that currency is sometimes on the ground, but that currency doesn't remain on the ground for long?

The EMH says, to the extent that says much of anything at all that is not manifest poppycock, that the market as a whole--a weighted average voting mechanism with weights proportional to the amount of wealth at play and to the strength of participants' preferences--will not pick up the note when the market as whole believes that note to be folded up paper and will pick it up when its belief structure--i.e., voting outcomes--is to the contrary. The experiences, consistent or intermittent, with real and fake notes by individual participants are entirely and completely irrelevant to the EMH except, of course, to the extent said participants' future voting are influenced by any such experiences with notes and that said participants actually have any influence on voting outcomes.

Thanks C.

Barkley - I think you just described some mechanics of EMH.

"After all, every day we're confronted with much more powerful evidence of EMH's fallibility." -Daniel Gross

Is that because we have more people emerging everyday who are consistently beating the market?

In the current days, PDF is not a mysterious format at all, many softwares come out to deal with PDF files, such as PDF cracker, PDF converter, PDF encrypter, etc. This PDF to GIF Converter is one of them which is specially designed for converting PDF to GIF format with 1:1 quality of original files. With the easy-to-use PDF to GIF Converter, you can not only convert PDF to GIF, but convert PDF to most of other image formats, such as TIFF, PNG, GPEF, BMP, etc. PDF to PPT Converter.

Your article is truly relevant to my study at this moment, and I am really happy I discovered your website. However, I would like to see more details about this topic. I'm going to keep coming back here.

Interesting article. It is amazing how much money some people make.

Comments for this post are closed