Chris Leithner of Leithner & Co has posted an essay on modern finance and Austrian economics. In the 1970’s a revolution in the academic view of financial econonomics took place. The basis of this shift was the “efficient markets hypothesis” which held in securities markets, all participants”have the same information and expectations and react identically to new information; price and value are synonyms; the prices of securities, which adjust so quickly to new information that they are unpredictable and thus render “excess” returns impossible”.
From there, it is reasoned that all systematic causes of securities price changes are removed from the market, thus any remaining fluctuations are essentially random in character. Risk, in this scenario is the degree to which prices randomly fluctuate. The mathematical description of random motion can then be employed to produce a theoretical framework in which stock selection is a waste of time and portfolio management is essence a mathematical exercise of balancing risk and return. Leithner contrasts this world view with an Austrian philosophy of true uncertainty and the role financial entrepreneurs, such as Warren Buffet, in seeking out opportunities in an uncertain world.
