The efficient market hypothesis is a cornerstone of classical investment theory. It asserts that the market is efficient, or instantaneous, in incorporating all public information into to the prices of securities. Under perfect informational efficiency, if a company releases higher than expected earnings, all effects of that information are expected to immediately be reflected in that company’s stock price. Buying shares of that company anytime after the earnings report is released, even within seconds, is a futile attempt to capitalize on an inflection that has already come and gone. This goes for all public information - financial news, politics, technological innovations, natural disasters, resource discoveries, etc. If all information is efficiently priced into the market, then market prices always equal intrinsic values. The only driver of price fluctuation is the introduction of new information, which is random (else, under this theory, it would have been acted upon and priced into the market already). Thus, the efficient market hypothesis implies that it is impossible to consistently outperform the average market return because there is no way to know what the market will do next without insider information. Outperforming the market is the product of randomness, not alpha.

We know that markets are not perfectly efficient in practice - the housing bubble and 2008 stock market crash are evidence of that. Investors can speculate, overreact, misinterpret information, differ on valuation assumptions, misjudge scopes of effect, and generally act irrationally by allowing emotions to get in the way of what should be logic-driven decision-making. An entire field of research called behavioral finance has emerged to study (and capitalize on) these irrationalities. Arbitrage schemes, which many hedge funds build their investing strategies around, operate by exploiting market inefficiencies.

If the efficient market hypothesis does not hold, does this mean an intelligent and informed individual investor can successfully beat the market? Well before you jump in, you should know what you’re up against.

Most of the trading volume in the stock market today, around 70% according to Wired, is the result of automated algorithmic trade executions. These programs, designed by quants and sophisticated investors, act on and react to technical trends and actionable input with split second haste. Tools like Lexicon from Dow Jones & Company, the news corporation behind the Wall Street Journal, enable these activities by releasing breaking news stories in terms that can be read, interpreted, and acted upon immediately by said programs. Wired explains:

… the professional investors subscribing to Lexicon aren’t human—they’re algorithms …They don’t need their information delivered in the form of a story or even in sentences. They just want data—the hard, actionable information that those words represent … [Lexicon] scans every Dow Jones story in real time, looking for textual clues that might indicate how investors should feel about a stock. It then sends that information in machine-readable form to its algorithmic subscribers, which can parse it further, using the resulting data to inform their own investing decisions.

With their sub-second reaction time, these algorithms make it very difficult for human investors to capitalize on public information; we can’t compete with programs that can price developments into the markets before we even hear about them. It sounds a lot like an efficient market, but it certainly is not. Interpretations are subjective, even for these algorithms, and program code can behave in unexpected ways. Wired continues:

[Algorithms] respond instantly to ever-shifting market conditions, taking into account thousands or millions of data points every second. And each trade produces new data points, creating a kind of conversation in which machines respond in rapid-fire succession to one another’s actions. At its best, this system represents an efficient and intelligent capital allocation machine, a market ruled by precision and mathematics rather than emotion and fallible judgment. But at its worst, it is an inscrutable and uncontrollable feedback loop. Individually, these algorithms may be easy to control but when they interact they can create unexpected behaviors—a conversation that can overwhelm the system it was built to navigate.

In May 2010, the NYSE experienced what has come to be known as the “flash crash,” in which a single trade tipped the scales prompting sensitive algorithms to launch a cascade of sell orders. The Dow Jones Industrial Average Index dropped 600 points in a matter of minutes.

And this isn’t an isolated incident.

In his book The Quants, reporter Scott Patterson explains that these formulas are rooted in physics and cryptography, and the imprecision and volatility in the markets stem from an underlying misconception on which these algorithms are constructed. BusinessWeek elaborates in an early 2009 article entitled “Perfect Models, Imperfect World”:

Physics, because of its astonishing success at predicting the future behavior of material objects from their present state, has inspired most financial modeling. Physicists study the world by repeating experiments again and again to discover natural forces and their almost magical mathematical laws. Galileo dropped weights from Pisa’s leaning tower. Giant teams in Geneva study what happens when protons repeatedly collide. If a law is proposed but experiments contradict its predictions, it’s back to the drawing board. The method works. The discovered laws of atomic physics are accurate to more than 10 decimal places. Financial theory has tried hard to emulate physics and discover its own elegant, universal laws. But finance and economics are concerned with the human world of monetary value. Markets are made of people who are influenced by events, by their feelings about events, and by their expectations of other people’s feelings about events. There are no fundamental laws in finance. And even if there were, there is no way to run repeatable experiments to verify them. Financial theories written in mathematical notation—aka models—imply a false sense of precision.

Effectively, the markets cannot be perfectly efficient, and hence there will always be opportunity. But competing with programs that can incorporate new information into the financial system immediately and trade in ways you cannot might warrant a change of approach. Here are a few passive strategies that would make more sense to use in new age Wall Street:

• Construct your own algorithm
• Employ returns-based style analysis to replicate a hedge fund or mutual fund
• Construct a passive portfolio using applied statistics
• Buy and hold the market
• Explore a site like Betterment

A friend of mine told me that I remind him of the science advocate in this webcomic.

The jellyfish pictured above, Turritopsis nutricula, has a rather extraordinary ability: like a phoenix, it can repeatedly revert from adulthood to its immature, polyp form and restart the process of aging, functionally rendering the organism biologically immortal. If the jellyfish can avoid disease, starvation, and predation, it has a potentially infinite lifespan.

In the same vein, the ubiquitous, microscopic tardigrades are some of the most resilient creatures on the planet. At only about half a millimeter long, they can survive extreme radiation, temperature, pressure, toxins, and dehydration. In fact, in a 2007 experiment tardigrades demonstrated the ability to survive in outer space, bombarded by solar radiation in a vacuum, for the full duration of the 10-day experiment. They are prime candidates for the Living Interplanetary Flight Experiment, an experiment that will send selected organisms into deep space on a three-year round trip journey. More to the point, in addition to being incredibly resilient tardigrades are not senescent - that is, they do not age and are, therefore, biologically immortal.

These are just two examples of many organisms with potentially infinite lifespans. In comparison, we know that human beings are genetically programmed to age and die. But immortality is not out of our reach. Research in genetics, bioengineering, nanotechnology, cybernetics, and many other fields continues to yield promising prospects - cybernetic implants and mind-to-computer uploading to name a few.

There is little doubt that technology-enabled immortality is in our future. However, this isn’t a post about the myriad pursuits of life extension. Rather it is about such a technology’s effect on humanity. The human condition is defined by cognizance of mortality; our sociology, anthropology, philosophy, and theology are predicated on our impermanence. We worry about making the most of our time, use medicine to extend our lifespans, and speculate on the possibility of conscious existence beyond death. 

There are several major social issues associated with the advent of technology-enabled immortality:

1. Productivity increase: Collaboration among a growing number of immortal experts might quickly revolutionize science, technology, and industry.
2. Resource shortages: With a stunted mortality rate, the population spike would rapidly deplete resources and endanger access to basic necessities like food and water.
3. Social structure: A single person might have several families over the years, the concept of retirement would have to be reassessed, selection for employment would become far more competitive, etc.
4. Immortality divide: There will be those who can afford immortality and those who cannot. That line is likely to form on financial lines, exacerbating the divide between the rich and the poor; “democratic human societies might ossify into rigid, caste-based” society.
5. Blurred humanity: Physiological augmentation might engender an individual’s identity as a human being. How human is an individual who is more cybernetic than organic? How human is someone with altered DNA?

On a personal level, cognizance of immortality also poses sapient immortals with an existential quandary: with all the time in the world on their hands, they fall into Sisyphus’ dilemma. What happens when personal immortality becomes social immortality? A collapse of society or alignment on a social objective? We may just live to find out.