Mathematical Finance Seminar
March 27, 2003 , 5:30 PM to 7:00 PM
Les Gulko, Paloma Partners
Mr. Oedipus, CFA
I study the interest rate forecasts published in the Wall Street Journal
since 1981and find that investors do not need to be rational for the market
prices to be efficient. A market inhabited by imperfect agents can be
efficient if the agents are numerous and suitably interconnected. In this
market, multiplicity and interaction compensate for individual
imperfections. I consider a large ensemble of low-grade investors who
interact by observing market prices in accordance with the Oedipus effect:
the investors randomly revise their expectations after they observe market
prices. The Oedipus effect ensures the diversity of individual expectations
even in the presence of a superior forecast. A maximum-likelihood model of
the Wall Street Journal polls agrees with the actual distribution of
forecasts. The statistical model also reproduces the CAPM, APT and
Black-Scholes.