Paul Meisel

Portfolio Building With Forward Looking Asset Allocation

I complement you on this article.

I had the good fortune to listen to Dr. Herbert Simon lecture on heuristics over 25 years ago, and his comments at the time raised hackles on the "efficient market" finance faculty. His main point was that as available information grows, the cost and difficulty of accumulating and processing it leads to diminishing returns of the utility of that information rather quickly. Sort of "KISS for Quants".

Another factor that you don't mention directly (but it is sort of implied in your previous writings) is that rational behavior for one investor may differ from another. Risk tolerance, tax situations, investment horizon, time and patience for accumulating investment information, and sophistication and emotions of the investor all lead to differing levels of demand for different financial asset categories, and the sea of investors is constantly changing like the surface of the ocean.

There is efficiency in markets, but there is a deficiency of understanding of what "rational" is for the aggregate market at any particular time.