There’s No Such Thing As A Free Office Chair
The idea that markets are efficient has come under fire in recent months. Can we be confident that market participants will make repeated, systematic errors? Consider an example. We were taking a walk in our neighborhood a few days ago and came across an office chair that one of our neighbors had put by the curb. My wife and our friend with whom we were walking remarked that they had seen this very same chair the day before. I decided to take the chair home: the wheels seemed fine, it was comfortable after a few seconds, and it offered the arm rests that my current office chair doesn’t. I plopped our nineteen-month-old down in the chair and pushed it home.
This morning, I learned why the chair was sitting by the curb. After sitting in it for a couple of minutes, I learned that it’s broken in such a way as to make you feel like you’re about to be thrown on your face forward and to the right. Next garbage day, the chair will be sitting on the curb in front of our house–where it will likely be picked up by one of the people who will occasionally drive through the neighborhood on garbage day looking for stuff that can be salvaged.
What does this say about financial markets? The salvage market in the places we’ve lived is extremely efficient. We have a decent bookcase that I picked up next to a dumpster in graduate school, but most of the opportunities to get useful stuff out of others’ trash are almost always snapped up very quickly. If people are quick to snap up marginally useful salvage on garbage day, it isn’t clear to me that we should expect people to leave multi-million dollar piles of money on the table in their financial transactions.