WeWork and Robert Shiller on the Efficient Markets Hypothesis

WeWork was and is, as well as being a hugely amusing tale of hubris, a lesson in the efficient markets hypothesis, the EMH.

As we might recall the little joke - economists aren’t all that good at this humour thing - the Nobel was awarded to Eugene Fama, Lars Peter Hansen and Robert Shiller, one for proving the EMH, the second for doing the maths, the third for disproving it. Which isn’t quite the way it did work. Shiller refined the idea.

That EMH not being a statement that markets are always the efficient way of doing things, nor that everything should be done by markets in order to be efficient. Rather, that markets are efficient at processing information. Thus things that are known are already in market prices.

Shiller’s addition was that this is only true when everyone in that market can trade their view. Thus, given the difficulty of going short housing the persistence and extremity of the American housing boom. And so his proposal that to limit future such problems there should be a futures market in house prices where people could bet on price falls. That would get the views of bears into market prices.

At which point, a comment on WeWork:

One of the great mysteries of modern finance is how to make money when you know there’s a bubble, or at least how to get much, much richer than everyone else. The obvious way is to bet against the bubble, but this is difficult, as its expansion can easily outlast one’s ability to finance the wager. It’s even harder if the bubble is primarily happening in the private markets, where it is very difficult, if not impossible, to directly bet against the fortunes of a company that you think is overvalued.

Quite so, it was the exposure of WeWork to those wider financial markets that precipitated the implosion. You know, the financial markets where a couple of months after the IPO people could go short the shares and thereby communicate their view that it was a dog. That echoing back in time to mean there was no IPO.

This also explaining why the EMH does indeed imply, even if not directly state, that markets are efficient ways of doing things. For the alternative to markets is command and control, usually by government. Which isn’t ever subject to that same reality confirming pressure of the opinions of those who are quite sure it’s a dog.

We offer HS2 as a confirmation of that contention. It’s only because it’s not subject to the oversight is people risking their own money that it’s lasted this long, isn’t it.