22 ATaleofTwoMarkets
dents of the random wal kmodel (and EMT) recognize based on the
foregoing analysis.
They are nonsense not because of EMT but because they fly in
the face of business analysis. As Ben Graham said of proponents of
such technical methods inThe Intelligent Investor: “We shall dismiss
these with the observation that their wor kdoes not concern ‘inves-
tors’ as the term is used in this book.”^5
On their own terms, the trouble with all these tests of the ran-
dom wal kis that they are linear. They do not investigate the presence
of nonlinear price dependence, something that in the early 1960s
researchers simply lacked the computer horsepower to do.
The trading rule test, for example, is linear in that it operates in
chronological time (or real time). Neither it nor the other old tests
consider the possibility that market time may be better understood
from a perspective that is nonlinear. We will get to that subject in
the next chapter, but for now note that Einstein demonstrated that
time is not absolute but works in dozens of different ways depending
on the context, including forward (or linear), backward, circular,
slow, and erratic (nonlinear), and can even stand still.
THE PERFECT DREAM
Many people suggest that EMT developed in a peculiar manner in
scientific research. The proof of the hypothesis came first, beginning
with Bachelier in 1900 and proceeding through the wealth of studies
reporting randomness in the early 1960s.
Only then was a theory proposed to explain the randomness,
beginning with the first explication of EMT in 1965 by Paul Sa-
muelson, a recipient of the Nobel Prize in economics in 1970.^6 Econ-
omists welcomed this proof. The conditions necessary to produce it
seemed tantalizingly close to those necessary to sustain every econ-
omist’s dream: a perfect market.
The perfect market is a heuristic invented by making the follow-
ing assumptions concerning a market: There are a large number of
participants such that the actions of any individual participant can-
not materially affect the market; participants are fully informed, have
equal access to the market, and act rationally; the commodity is
homogeneous; and there are no transaction costs.
A perfect market would give you exactly what the random walk