One of the first lessons I learned from a wise old trader was that markets move in a way that will cause people the most pain. I have sometimes found markets will cause me a lot of pain on a personal level, sometimes more pain than I can bear. However, since markets usually move with the path of least resistance, how can I reconcile the old trader's statement with efficient market theory? I never did ask him to clarify that statement, and just put it into the back of my mind. The only way he could be right is if he were referring to "people" as the general public… I don't know. Any thoughts or opinions would be greatly appreciated.

Vincent Andres replies:

"The Pareto distribution, named after the Italian economist Vilfredo Pareto, is a power law probability distribution that coincides with social, scientific, geophysical, actuarial, and many other types of observable phenomena."

– The biological world, eg jungle, is often paretian ie 10% of the jungle animals consume 90% of the jungle resources (the top of the pyramid) and 90% of the jungle animals consume 10% of the jungle resources.

– The markets are an extreme example of jungle, extreme, because since people rarely die from their failures, stupid behaviours may continue more than in a real jungle. I see the market as an extraordinary paretian machine. The normal, good working order of the machine, maintains/produces continuously a paretian distribution of the wealth among the players.

There are 90% of people who are easy to deceive and 10% of people less easy to deceive. … so the efficiency (if any), the "path of least resistance" goes exactly thru this 90/10 distribution, (and not thru an imaginary 50/50 distribution which simply doesn't exist (except maybe in some socio-communist idealized world)).

I would have rephrased your sentence as : "markets move in a way that will cause most people pain."

and this is not the fault of the "markets", the market is nothing else than the place where the people (with their 10/90 split) met. The market partition is just the people skill partition.


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