Comment by Retric
1 day ago
You misunderstood a basic principle here.
In a perfectly efficient market all entries can make the same profit on a given investment at the same level of risk and time horizon. There’s nothing inefficient about a market having a risk premium etc.
If you're making nonzero profit that means that it's feasible for anyone else (literally anyone else, assuming zero barriers to entry, which we do assume for an efficient market) to make slightly less profit by selling the same product at a lower price, which iteratively pushes all profits towards zero. An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question. If that sounds absurd, then yes, that's the point: our assumptions about what it takes in order to achieve an efficient market approaches the absurd. Which isn't to say that markets aren't often useful, especially compared to the alternatives, but rather that appeals to rationality don't survive contact with the enemy.
The economy is finite. You can’t infinity add new participants with infinite product to sell.
Instead in an efficient market everyone is already occupied making X ROI and gives as much up by entering a new market as they gain.
Put another way, if you already own a sock with 10% ROI, you can sell it and buy a sock with 10% ROI but the transaction is pointless so it doesn’t occur.
> An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question.
Perfect information means something different here. In Chess both players have perfect information of the game state, they don’t know the future. Poker has randomness and imperfect information but there’s other games with randomness and perfect information.