But I haven't read it yet:
The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real WorldI think Munger gets it wrong when he writes:
Roger E.A. Farmer, Carine Nourry, Alain Venditti
NBER Working Paper No. 18647
Issued in December 2012
Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents' discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not.
An objection to the ability of markets to get the rate of time discount "correct." My question: as compared to what? Compared to legislators with a two year time horizon (okay, six in the Senate, right after an election)? Why don't people make fun of the "efficient governments" hypothesis? The libertarian argument is not that markets are perfect, it's that politicians are even more short-sighted.Again, having only read the abstract, I don't see this as saying that the actors aren't discounting correctly, but that they are discounting differently. This paper is still making pretty strong assumptions -- complete markets and no transaction costs -- but simply showing that with heterogenous agents financial markets are not Pareto-optimal. This is a big deal! It is also in line with things Steve Randy Waldman has been writing about for awhile (e.g.).
I don't think it implies quite what Munger thinks it implies; inefficient/irrational markets could still be more efficient or more rational than politicians. In fact, I imagine that the model would show that the market with a larger number of actors performs better than it would if it were controlled by a smaller number of actors, e.g. a government. But maybe not. I'll have to read it first.