Wednesday, November 05, 2008

How Dave and I Learned about Efficient Markets

Markets, especially political markets, really are efficient.

I happened to be in downtown Chicago yesterday, Ground Zero of what was shaping up to be—hours before the polls had even closed—an Obama victory celebration unlike anything American politics has ever seen.

And the most striking thing about it was you could feel what was coming in the air.

A sort of magnetic pull seemed to be carrying people towards Grant Park from every neighborhood in the city. People wearing Obama buttons and Obama hats and Obama shirts with “I Voted” stickers on them walked in pairs, in groups and in long lines. And they were lining up at barriers in the park, to wait in the unusually warm afternoon sunlight for whatever it was they seemed to know was coming.

I’d seen this before—this anticipation of something coming, something already in the air before anything was officially declared settled. Only it was on the losing side of a political campaign.

The politician was Massachusetts Senator Edward Brooke, the first African-American Senator elected since Reconstruction. Immensely popular until a bitter divorce, Brooke had been struggling to hang on for a third term in the Senate.

His challenger was a bright, attractive Congressman named Paul Tsongas, who would later run unsuccessfully for President and die an untimely death from cancer. For reasons not entirely clear even thirty years later, Brooke’s campaign was largely entrusted to a bunch of recent college graduates—including a guy named Dave, and yours truly—whose main talents tended towards pretty much anything except what a well-run campaign needed.

And so, Brooke lost.

In truth, he’d lost weeks before the campaign ended, but not one of us had figured that out. So come election night, Dave and I stood around the badly-named Victory Party watching returns coming in on a TV monitor, wondering where everybody else was.

‘Everybody else’ was at the Tsongas party.

And that’s when Dave and I learned how efficient markets—and politics—can be. The crowd knew it before we knew it, before the networks knew it, before Brooke himself conceded.

[Minor historical footnote: thanks to Barbara Walters' shameless book-plugging, we now know that she was having an affair with Brooke during his campaign, so perhaps the blame for his defeat does not accrue entirely to David and me alone. Perhaps.]

Walking towards Grant Park yesterday took me back thirty years, almost to the day of that realization. Markets—especially political markets—are extremely efficient.

Whichever way you voted, it was kind of cool.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

well interesting that you turned the old saw on its head - conservative in youth and liberal later in life.

Anonymous said...


Every once in a while, well maybe more than every once in a while you say some pretty bone headed things (that's another way of paraphrasing a modified version of a famous Bill Clinton anectdote: 'Stupid, its the economy [not the market].' that has delivered Obama to his current position.

I will leave you with this: Karl Marx and certainly Barack Obama understood capitalism better than you.

As it was Marx who said these two riviteng quotes: “History repeats itself, first as tragedy, second as farce.” and “Democracy is the road to socialism.”

And besides Marx, who else has guided every move he has made and every thought he has thought on the teachings of Karl Marx? Why, Barack Obama of course. If you don't believe your own naievete, just wait and watch.

Any time you have Hamas, Hugo Chavez, the whole nation of Kenya, Iran, and Osama Bin Laden supporting our current president elect, you definitely have something not of your politics or fiscal belief structure.

I am not makeing this up.

Unknown said...

It was VERY cool!

Anonymous said...


This list of historic stock market tracks for the Dow the day after a presidential election should be enough to shake you out of the hypnotic Obama induced glow of his knock of of the `I have a dream' speech last night (today's market reaction was the worst in recorded history for America on the day after the election):

The following table shows the percentage rise or decline in the
Dow Jones industrial average .DJI, Standard & Poor's 500 index
.SPX and Nasdaq composite index .IXIC on the day after a U.S
presidential election and who won the Election Day vote.
Year Dow S&P Nasdaq President elect
2008 -5.05 -5.27 -5.53 Barack Obama
2004 +1.01 +1.12 +0.98 George W. Bush
2000 -0.41 -1.58 -5.39 No decision: G.W. Bush v Al Gore*
1996 +1.59 +1.46 +1.34 William Clinton
1992 -0.91 -0.67 +0.16 William Clinton
1988 -0.43 -0.66 -0.29 George H. W. Bush
1984 -0.88 -0.73 -0.32 Ronald Reagan
1980 +1.70 +1.77 +1.49 Ronald Reagan
1976 -0.99 -1.14 -1.12 James Carter
1972 -0.11 -0.55 -0.39 Richard Nixon
1968 +0.34 +0.16 --- Richard Nixon
1964 -0.19 -0.05 --- Lyndon Johnson
1960 +0.77 +0.44 --- John Kennedy
1956 -0.85 -1.03 --- Dwight Eisenhower
1952 +0.40 +0.28 --- Dwight Eisenhower
1948 -3.85 -4.15 --- Harry Truman
1944 -0.27 0.00 --- Franklin Roosevelt
1940 -2.39 -3.14 --- Franklin Roosevelt
1936 +2.26 +1.40 --- Franklin Roosevelt
1932 -4.51 -2.67 --- Franklin Roosevelt
1928 +1.20 +1.77 --- Herbert Hoover
1924 +1.17 --- --- Calvin Coolidge
1920 -0.57 --- --- Warren Harding
1916 -0.35 --- --- Woodrow Wilson
1912 +1.83 --- --- Woodrow Wilson
1908 +2.38 --- --- William Taft
1904 +1.30 --- --- Theodore Roosevelt
1900 +3.33 --- --- William McKinley
1896 +4.54 --- --- William McKinley
* George W. Bush ultimately was determined the winner of the 2000
Source: Reuters EcoWin

Anonymous said...

The markets weren't that efficient in 2000. We drove from NYC to Seattle starting the day after the election and still didn't know who had won when we got there.

Wisdom Speaker said...

Excellent story! However, what you've presented doesn't imply that the market is efficient (in the sense of rapidly and correctly establishing the long-term value of anything), only that a small subset of the crowd is capable of divining which way the crowd is going.

In other words, a group of traders can "efficiently" set a price that the rest of the marketplace agrees with at the moment.

But whether that price accurately reflects the true worth of the article being priced -- is an entirely different question. The marketplace as a whole can be deeply inefficient, whenever the herd "gets it wrong" and generates a bubble & crash.

PhillipCharles said...


From the footage broadcast on Election Night, labeling Grant Park as 'kind of cool' may be a huge understatement. I congratulate anyone who was able to have that experience.

The palpaple energy that you noted had drifted all the way to Cambridge, Mass by Wednesday afternoon. There was an electricity in the air that did not exist during the day on Tuesday, where there was a notable tension and uncertainty throughout the evening. Wednesday, that anticipatory feeling had finally made its way to the east coast. Granted, this is the bluest city in America, but, like in Chicago the day before, it was impossible to ignore...

As far as efficient markets are concerned, it appears that the Republican Party as an asset was 'overbought' and voters had their first chance to act rationally with full information.

Jeff Matthews said...

Alas, most of these comments mistake a non-partison obervation about crowd behavior for a partisan comment on the outcome of an election.

There was no direct comment, that I can see, on Tuesday's election results, in "How Dave and I Learned about Efficient Markets."

Even re-reading it, including the line 'Whichever way you voted, it was kind of cool,' has no bearing on the election itself. It bears on the ability of a crowd to smell victory and defeat long before the numbers are in.

And to that point, "Wisdom-Seeker" makes the excellent observation that the fact that markets are efficient--i.e. information gets disemminated rapidly--does not necessarily mean the crowd is right about the long-term success or failure of the election-night winner.

Whether Obama is a fundamental 'buy' or 'sell' right now--and most seem to have read into my observations that he is a 'buy'--is an entirely different discussion from my observation that the crowd had the Tuesday night results right, half a day before those results were in.

Also, to correct Anonymous #1, Ed Brooke was actually not conservative. He was what used to be known as a "Liberal Republican"!


Anonymous said...

>"Whether Obama is a fundamental 'buy' or 'sell' right now--and most seem to have read into my observations that he is a 'buy'--is an entirely different discussion from my observation that the crowd had the Tuesday night results right, half a day before those results were in."

I guess you mean in the effects of Einsteinian Spooky Action in physics that has been pretty much confirmed by the Princeton Global Consciousness Project better known as the Princeton Egg project

I tend to defer the reasons for your theory to the concept of reification of ideas. Which works in the way that a belief system (i.e., Believing Obama should be president) can become the dominant belief of a crowd whether it is true or not. It is a process better known as crowd manipulation where a strong speaker can convince one or more in believing what he believes and the crowd effect of many many people believing the same thing therefor convinces untold millions that it must be true. Adolf Hitler was the absolute master of this process. Obama has that skill, McCain does not.

When you add up the reification effect (reinforcement of belief) over the two year duration of the campaign, it became obvious who was going to win. Only an optimistic idiot would not have known that.

I find it even more interesting is that the stock market has figured out that he was going to win but that it would not be a good thing. Now that is sophisticated analysis of individuals on a mass scale.