There is a ‘classic’ joke about two economist walking across the campus quad. They see a 20 dollar bill on the ground and one goes to pick it up and the second prof, stops the first by saying, ‘markets are efficient, if the $20 dollar were on the ground it would already be gone.’ So the first stops and leaves the money there.
Now I think that the joke is a little harsh toward academics. Yes sometimes they seem to model for the sake of modeling and want reality to conform to their models instead of the other way around but they do so at their own risk (the better ones try to account for these things and when they don’t they do so explicitly to show the core elements cleanly). The point of the joke is that the economist fail to recognize the friction in the efficient market or put another way someone has to make the markets efficient (they have to actually pick up the bill).
What made me think of this was I was looking at an asset and was struck by an unusual event. The bid (what someone was willing to pay for the asset) was higher than what someone was willing to sell it for.
Now I don’t know many of the technical details of how various exchanged manage matching across their books but its it important to remember these types of details – even if it, which more often than not may make sense, via a humbling process in the model.
