The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

by Scott Patterson

The idea that the market is an efficient, randomly churning price-processing machine has many odd consequences. Fama postulates a vast, swarming world of investors constantly searching for inefficiencies—those hungry piranhas circling in wait of fresh meat. Without the hungry piranhas gobbling up juicy fleeting inefficiencies, the market would never become efficient. Would the piranhas exist without the fresh meat? No fresh meat, no piranhas. No piranhas, no market efficiency. It’s a paradox that continues to baffle EMH acolytes. Another offshoot of market efficiency is that, if true, it effectively makes it impossible to argue that a market is mispriced—ever. When the Nasdaq was hovering above 5,000 in early 2000, it was impossible to argue at the time that it was in a bubble, according to EMH. The housing market in 2005, when prices for many homes in the United States had doubled or tripled in a matter of a few years? No bubble.