Reaching the peak of the world population

An intersection in Tokyo, the biggest metropole in the world (7.3.2009).

The world population is about to reach the 7 billion milestone very soon - actually in just a few days at the end of this month according to many sources. The figures are of course somewhat inexact, but there's no denying that the world population has been growing at an incredible rate - it has after all more than doubled in the last 50 years. How about the future - what will happen in the next 50 years and in the time after that?

Only one thing is for sure: population growth cannot continue forever. At some point the population has to reach its peak. It may be interesting to evaluate or prophesy what the maximum figure will be, but I think there is one question that is more interesting or at least more important: how will this peak be reached? Will it be a bubble that bursts violently through a crisis initiated by a combination of ecological disasters, shortage of sustainable energy, ravaging famine and social problems or perhaps even something totally unprecedented, resulting in a dramatic decline in population? Or will the growth rate just steadily slow down to a point of stabilization? Of course there is also a third question that perhaps isn't really asked that often: will the anticipated peak be the permanent population maximum, or will it be superseded by a new peak after a temporary slump?

In any case, many people seem to think that the point of the (next) population peak will inevitably be a dramatic event. As of now, no-one really knows what it will be like, but the fact is that the relative population growth rate has already been declining for many years. As the standard of living and life expectancy increase, family sizes decline, which can be easily seen for example from the incredibly illustrative statistics service called Gapminder. The service shows each country plotted on a graph in a fashion that's essentially 4-dimensional, and you get to determine the variables for the axes yourself. For the same message you can alternatively check Hans Rosling, the man behind gapminder speak about population growth in the video below (If you don't want to check the entire video, you may want to skip straight to watch the minute from 7:00 to 8:00).



Contrary to Rosling's words, some might see him as an optimist. If he is, then I'm probably one too. Whatever challenges population growth may present, mankind has the ability to adapt. I believe the population peak won't be reached before the round figure of 10 billion people, but when it will, it may very well be an undramatic event.

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Perils of biased attention

Man has always shown a certain level of attentional bias. Some parts of this bias are inherent to the way a human thinks, whereas other parts are affected by the surrounding sociocultural environment. The latter type is more susceptible to change of course, since societies and cultures change but the human mind essentially doesn't.

Information is nowadays ubiquitous, which means that we have much more options when sharing our attention. In addition there are a lot more ways to direct and control that attention. When attention is directed in a certain way, it also affects the way others try to draw that attention. I see modern technology currently shaping the way we direct our attention on three different layers.

1. Personal

People naturally pay the most attention to things that they are personally interested in. This may sometimes lead one to overlook something that would actually have significant value or broaden one's perspective. Nevertheless, this is of course very normal: people have different interests and that's it. However, technology is nowadays boosting this bias, which is well described by Eli Pariser in this speech:


The speech points out that what you see on Facebook and even on Google is individualized to meet your interests. This means that views you don't that easily look into don't even get the same possibility of being represented to you. In other words, when for example googling for something, you end up in an informational bubble: you see what you want to see, which probably makes the experience more pleasant and entertaining, but on the other hand may prevent you from seeing something that would be more beneficial. As a result personal viewpoints don't get challenged as easily, but rather become more narrow. Individualization of course often helps in finding results quickly, so it does have its meaningful purpose, but this should happen in a more transparent way and the user should have more control over the process.

2. Groups

Another source of attentional bias are social groups. People tend to spend time and socialize with like-minded people. As a result their current views may easily get stronger where as different ones may get ignored. This is once again of course quite natural, since people do have different interests.

The internet, however, has made the process of creating and finding these interest groups much easier. There are countless internet communities that deal with all sorts of things that may be socially questionable, just plain weird or politically radical. Once someone gets tilted in a certain direction, joining a related internet community is quick and easy. As a member of a community, those already existing views easily get stronger and stronger. What boosts this potential development further is the anonymous nature of the internet. People may write things they would never say out loud, but when the words are read, they might be interpreted as strongly as if they were in fact spoken words. Sometimes an internet troll might even throw in some seemingly absurd opinions that some take seriously and actually agree with.

So getting involved with like-minded people is easier than ever. On the other hand due to the freedom and ease of speech around the web, it has also become easier to disrupt the discussion and activity in such groups. Anyone from outside a community may easily go in and write some alternative views. Similarly, anyone from the community is also easily capable of searching for alternative views, which is why the internet probably hinders the most radical thoughts in general. Still, it may take a lot of effort and will to actually take an opposing stand in a different-minded group, and doing so will probably still feel unrewarding. The members of a community may likewise often feel that it's enough if they participate within their favourite community. Considering this, a certain way of radical thinking may easily grow if someone is unwilling to look at things from an objective perspective.

3. Content creators

There is the old phrase that states "there is no such thing as bad publicity". This is not entirely true, but does hold a valid thought: by default, all publicity is good for business. As such, even bad publicity is often for the good, as long as it's nothing really catastrophic. It doesn't matter that much if much of the attention is negative as long as there is a positive or even just neutral interest to go along with it.

In a certain sense, social media is currently making this more true than it has ever been. The reason for this is the user ability to "vote" for all kinds of content. In some cases voting basically means just rating the content, which is the practice for example in the internet movie database IMDb and used to be the practice on YouTube as well. This doesn't really cause any bias, since both good and bad votes are quite equally taken into account. However, it's a-whole-nother deal when the voting capability is restricted. One might argue that even the thumb up vs. thumb down practice is already a bit more prone to a certain level of bias, but taking the negative side away entirely is almost bound to give a delusion of excellence under certain conditions.

Social media is affecting the way we look at the world.

Probably the most significant "voting" method around the internet is currently the "like" button offered by Facebook. Just like its more recent Google equivalent the "+1" they both only express positive experience. Granted, the real purpose of them isn't really evaluating the content. The real reasons are gathering information about the users, giving the content providers a way to promote and distribute their content in order to make them want to integrate and spread the system, and to keep the whole system ticking by motivating the users with a neat experience. From the user point of view it isn't really about rating either, but rather sharing, so should there be a problem?

The symbiosis works brilliantly, but something may be sacrificed in the process. Even though this probably isn't a realistic example of Facebook users, let's consider a group of introverted fanatics as an illustration. When someone part of the group writes something that fits the group's agenda, it's probably going to be "liked" by most from the group. However, even though the majority of the people outside the group would consider it absolute nonsense, this wouldn't show anywhere. Now, when the same people see how many people have "liked" the writing, they may think the writing really tells the truth and really is outstanding in all aspects - which is what I refer to as a delusion of excellence.

So people don't see the net popularity of a specific content just by watching the "like" or "+1" figures, since the negatives aren't measured. This does affect the view people take on a specific content, but the main issue here might still be that of sharing the content. Accordingly, what's perhaps even more interesting is that writers and other content creators may try to adapt to this social peer-based distribution. For example, let's consider two writing styles from which to choose:

1. Strong and simple statements, that are in principle justified but are essentially and maybe even deliberately one-sided.
2. Analytical style that tries to consider all points of view, analyzes them and ponders what could possibly be the best possible outcome.

Think about these two for a while. Which do you think would be more popular when talking with some friends by dinner? How about which would gain more popularity in the social media terms: which would gain more "likes" or "+1"?

I believe this is something where social media differs from a traditional social situation. When you talk with someone and recommend an article to someone, you will probably describe what was good about it and what perhaps wasn't so. Pressing "like" on something is often much more shallow and thus less of a recommendation. In some cases sharing an article might actually be even the opposite with the purpose of just pointing out the absurdness or stupidity of an article. More common is probably the situation where someone faces an article, quickly sees that it basically has the same point of view as the reader has, and thus decides to "like" it. However, if the article would be more analytical, it would require more effort from the reader to actually go through and decide if he agrees on most of it. As a result the first one of the above styles could really appeal to some, but cause negative reactions in others, whereas the latter one would probably cause less reactions on both sides - and thus get less "likes".

A writer or content creator usually wants to have his content shared by as many as possible. So, if an analytical, more challenging article would get less distribution around the social network, a writer might be lead into simplification and making an article intentionally biased. A certain level of intentional provocativeness is by no means an entirely new thing in the media, since provocativeness happens to sell. But just like with the layers 1 and 2, the social media in its current form might be boosting this kind of behaviour. All of this might result in what Pariser referred to in his speech: information junk food.

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Crippled by space money

In the South Park episode Pinewood Derby (originally aired 15.4.2009) the countries around the globe get their hands on a pile of what they think is stolen space cash. When the Intergalactic Police comes to make inquiries about the cash, the countries deny knowledge of such money. Instead they go on a spending spree not realizing that the cash actually holds no value but the value the countries themselves give to it. Amidst the folly, Finland is the only country who would like to come clean. As a result Finland faces the fate of an unwilling martyr, whereas the rest of the countries later end up realizing that through all the lies they were in fact condemning themselves to a life without a possibility for real growth.

Somehow, all of this sounds awfully familiar.

A huge pile of space cash as depicted in the South Park episode

What we're now experiencing in Europe is the result of another type of space money. Greece, most notably, did what the countries in South Park did: it lied. In other words, it misrepresented its fiscal statistics in order to join the party and get its share of the space money. As a result it got money for a cheaper price that would have been fundamentally justified - just because it was part of the monetary union. As years passed, the illusion of a steady source of money led to deeper debt, which would eventually explode into a myriad of problems for the neighbouring countries as well.

Just like in the real world, the ultimate breakdown didn't occur all of a sudden in the South Park episode either. In the television series, as countries such as Mexico and Japan were spending huge amounts of money on water parks and giant robots, the Intergalactic Police expressed suspicion. Still, the nations kept lying and were thus sweeping the issue under the carpet. The constant yet obviously inadequate attempts at bailing out the troubled economies could be considered as a real world equivalent to this: lending money to the troubled economy can in fact be just postponing the inevitable.

Since a financial breakdown is an unpleasant scenario with a highly unpredictable outcome, it's tempting to try to keep it away for as long as possible, even if it would be likely to make it even worse in the end. No one wants to be the one to cause an economic crash or to be a party pooper. Accordingly "not on my watch" may in practice be a major guideline for many politicians: if the problem culminates after their watch they might not be the ones to blame.

In South Park, Finland tried to "spoil the party" by bringing the downward spiral of lying to a stop, but the other nations literally shot the messenger before it could act. This was undeniably bad judgment and a disaster not only for Finland but for the rest of mankind as well. In our actual debt crisis, Finland has also taken the role of a troublemaker of sorts by demanding collateral from Greece. Greece and Finland even made a bilateral deal about it four weeks ago. Even if its idea of using cash as collateral for cash seemed absurd to begin with and was abandoned as such by the rest of the union, the underlying message might have been a bit different: the whole bailout is an act of folly, since Greece will default any way.

Greece's default is just around the corner. One of the few questions remaining are what would be the best time for the default to happen and when will it actually occur. An essential factor related to the latter question is how the timing will affect the other troubled economies like Portugal, Ireland and Spain. In any case, postponing has already been going on for 1,5 years and banks have had plenty of time to react to this, so couldn't it already be time to let go and just recapitalize the banks where necessary?

The people in the world of South Park were put to the test when they got the space money, and they failed miserably. As Greece falls, EMU and the euro will be put to the test as well. We'll probably do better than they did on South Park, but it still might be a bumpy ride.

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Does short-selling make a difference?

Short-selling refers to the practice of selling securities like stocks without owning them in the first place. The seller just borrows the stock eg. from a broker to be able sell it, then tries to buy the stock back cheaper in order to give it back and make money out of the process. In so called "naked shorting" the seller doesn't even make that the security can be borrowed. Needless to say, it is a risky process especially considering the potentially limitless losses a short-seller may have to endure. But it can result in significant profits as well.

The thing that makes this a timely topic is the fact that Italy, France, Spain and Belgium set a ban on short-selling two weeks ago to calm the plummeting stock markets . A couple of days ago, they decided to extend the ban for probably at least till the end of September (see Reuters). Were the bans a good decision? An average person usually finds short selling a crazy, speculative and detrimental practice that should be banned not only for a limited period of time but permanently. Many people working in the field of economics on the other hand think that short-selling makes the market work more efficiently and should never be banned. But does short-selling actually make a difference? And if it does, why, how and when? Let's have a look.

An equal selling offer and a buying bid - this should result in a transaction, right?

Starting with the facts, both the people against shorting and supporting shorting can be seen as having legit points. Firstly, like the layman sees it, trying to make money out of falling stocks is not productive for the society in general. On the other hand neither is regular trading. Secondly, like those who support short-selling assert, shorting does support market efficiency. To have a transactions you need someone who is willing to buy and someone who is willing to sell at that price. Anyone can buy shares even if he or she didn't own any, but to be able to sell, you have to own shares of that certain stock. In other words, without short-selling there is much more potential to make a bet that a stock will rise than to bet that a stock will fall.

This partially unilateral nature of a market without the possibility to sell short has a couple of implications. For one, it means that there will be less people willing to sell. This means that the spread between the buying and selling bids increases, which can be seen as making transactions more expensive - in other words the stocks become less liquid. What's more important is that without short-selling, bubbles could easily become bigger, as many of those who would want to bet on falling prices simply wouldn't be able to do so. On the other hand in the case of falling stocks, selling short can make the prices fall unnecessarily deep. Accordingly selling short can make a difference in terms of how stock prices behave. That on the other hand might affect how tempting it is to start trading on the stock market or how the wealth gets redistributed eg. in times of crises.

But does that matter much to the layman who doesn't have a dime invested in the stock market? It might. Stock market doesn't exist in a vacuum, but rather reflects the confidence in economy in general. The bigger the bubble the stock market experiences the bigger the general downfall may be, and the more dramatic effects it may have on the real economy - thus also affecting the life of the layman. In that sense, short-selling can be good for everyone. On the other hand, in a bearish market it might make the overreactions at the lower end more deep and thus cause unnecessary damage to the real economy, which would make short-selling bad in that situation - even though studies haven't found many signs of this.

Short-selling does make a difference for all of us. Especially thinking about overheated markets (like in 2007), I think it's better to always allow short-selling than have it permanently banned. Still, I'm not sure if bans are always a bad idea either. If imposing a ban on short-selling ever makes sense, it should probably be at times when the stock markets are being hit particularly hard - like it now has been.

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World in turmoil

Just a couple of years ago perhaps the most major subject of global debate at least from a European perspective seemed to be global warming. The reason for this increased interest was probably largely the fact that on the surface economy and life seemed to be developing so smoothly that there was enough mental resources to concentrate on something that's below the surface; something that seemed to call for serious long-term planning. Now, even with some small glimpses on the subject we get especially through the misery and famine caused by the drought in East Africa, several other more acute themes have taken over.

The world is in turmoil. As the death of one man caused the whole Arab street starting from Tunisia to stand up and demand for proper human rights for the average citizen, Europe is also starting to face more riots that are fundamentally stimulated by immigration-related social segregation, latest of which we've now seen in London - riots that were also initiated by the death of one man. On another front, the supply and demand of oil have reached the point where extracting oil from for example the bituminous sands in Canada has become lucrative despite the expensiveness of the process. Utilization of oil is thus reaching its final frontiers, while another form of energy, namely nuclear power is facing serious opposition and even shutdown plans eg. in Germany due to the terrifying aftermath of the tsunami that hit Japan in March this year.

Still, the economy is currently taking the biggest headlines in the western world. Whereas many economies in the East, most notably China are still rapidly developing, the economies in Europe and the United States are facing serious issues with debt and insufficient economic growth. A week ago we got a significant indication of this: one of the three major credit rating agencies Standard & Poor's downgraded the rating of United States from AAA to AA+ for the first time ever. This change, even though perhaps not that big per se, is historical and might be a sign of what's to come.

'World sucks', a statement painted on a stone in Athens during the 2008 Greek riots. (Picture taken on 29.12.2008)

Environment, democracy, culture, energy, finances - they are all important areas of how the human world functions. The politics, economy and social relations around the world are becoming more global year by year, which causes local troubles to span across the globe more easily. The philosopher Hegel once said "periods of happiness are empty pages in history". This doesn't mean that mankind would need wars, but sometimes difficult times can result in something better in the end. Accordingly, the interesting question is, how the world will appear once things settle down.

On a global scale, the economical turmoil might have a favourable outcome in the end: a more equal world, with a wealthier east and hopefully a more balanced financial system everywhere. The disturbance in the Arab world should also finally result in sounder, more democratic societies. The question is just when and how this will exactly happen, but like we've seen, the ease of spreading ideas through modern technology can give a serious boost to potential revolutions.

What's potentially more unsettling in the longer run are the subjects that are not currently hitting the headlines. Global warming (whether caused by mankind or not) might have much more dramatic and seriously detrimental consequences at least in some parts of the world, even though I don't find widespread or large scale problems very likely. But how about what will happen when the global economy is back on track again? The demand for oil will increase, and if we've reached the peak in oil production, the prices might easily skyrocket to levels that are ultimately unaffordable by both individuals and businesses alike. Is the global infrastructure really prepared for that?

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Marketing evil

76 people were killed in the attacks in Oslo and Utøya in Norway last friday. As atrocious as the act was, the perpetrator, Anders Behring Breivik has described it as a "marketing operation". To him, it in fact was that, which is yet another example of how cold and calculative he was and - still being alive unlike most of other similar killers - still probably is. As a real act of terrorism with dozens of victims it's of course belittling to call this marketing. However, there are many inviduals, groups, companies and other organizations that don't do direct harm to anyone but that in some way do promote things that are at least malevolent, but often also downright illegal and cruel. Even murdering gets promoted.

Before handling the violence, let's first consider something else. Tobacco products are a prime example of something that is bad for you but has been promoted a lot in the past. They however have been put at a real tight spot nowadays. You simply cannot advertise them in many countries. In fact, it has lately become the opposite: instead of showing brand logos, cigarette packages have to underline there unhealthiness through capital-sized letters that tell you eg. that "smoking kills". This is all good, but it's still interesting to note how people have gone through all these measures, even though nowadays smokers are any way pretty aware of the dangers of smoking and that smoking is always a choice.

So do people show the same commitment to prevent violence? When tragedies like the one in Norway have happened, there has often been a tendency to blame the violence in entertainment such as computer games, movies and television series. Due to the perpetrator still being alive and having political motives, there might be less of that this time, but in general these questions do come up. Especially in the internet communities there has usually been a very strong disagreement with this view of entertainment being the cause of the tragedy. Common, rather naive arguments include "no sane person would do this no matter how much he plays a game" or "I've been playing this for hours almost every day, and I never feel like killing anyone".

It's of course very difficult to say how these things affect people, but I think it's clear that everything we see in entertainment affect us in some way. In case of computer games, the player also has an active role in the violence so I don't find it far-fetched that their influence is towards making people more violent. So in case a person is enraged by something to begin with, this violent entertainment might make it worse and push the person to violent actions in real life. Even so, this doesn't mean that fiction involving violence should be banned, even if it glorifies the violence. For some that may even be a good way of channeling negative feelings. Still, one should never deny that violent entertainment may promote real violence.

Then we have the news media. Especially in cases like this, its role becomes quite controversial. How to treat those involved with proper respect is of course a serious question, but it might still be relatively trivial compared to how to handle the perpetrator. On the other hand it's important to recognize the motive and to get an image of the character in order to be gain knowledge on how one could possibly prevent similar events from happening. On the other hand that's exactly what the criminal often (and at least in this case) wants, and thus all the media attention brings the message to all potential killers that by killing many people, one will certainly be heard. In addition, big headlines with the killer's face may also be a tempting fantasy for other potential murderers. So, by trying to get high sales a newspaper may in fact promote violence, and even trying to prevent further violence may also simultaneously promote violence. It's a real dilemma.

Tobacco can be justified with free will and being mostly harmful just to its consumer. Violent entertainment, even with the possible bad consequences it might cause, can also be justified by giving people enjoyment and basically being just a way of sharing information and experience. Still, not only the marketing but also the consumption of both of them are regulated at least in terms of limits concerning age and place.

News media is not only justified but also needed for spreading knowledge and awareness. However, it also has to be bound to certain rules as well. More generally, outside the mass media, freedom of speech is an even more important part of an open society that wants to improve the quality of life of all its members. It isn't limited in the same way as the media is, but still bound to some rules around the world. For example, hate speeches or incitement against ethnic or racial hatred are illegal in most countries.

Spree killing, sponsored by Google?

(the site as seen on 25.7.2011)

Entertainment, media and general freedom of speech are all basically just sharing information with certain rules. But how does eg. the site spreekillers.ch stand in this? It calls itself the "International Committee of Competitive Spree Killing", and lists all the worst killing sprees as a highscore list, as if killing was a game. The absolute majority of people will find this kind of site tasteless to say the least, but should it be allowed to exist in the name of freedom of speech? Doesn't this kind of a list persuade to kill as many as possible to get the "ultimate highscore"? Even though that can never be the only reason for the cruelties, it's a goal that can probably boost the ego of a serial killer and in the worst case be the last straw to push him over the limit. Thus, the site is basically promoting evil.

So if incitement against ethnic groups can be illegal, why not incitement against humanity in general? Doesn't SWITCH have the legal possibility to shut down such questionable content? It's of course hard to permanently close certain content on the net, but at least showcasing it can be made harder. In some cases one possibility for this is cutting the possibility for their funding. As a matter of fact the most startling about this is related to exactly that. If you look at the screenshot above, you'll see that the site has been running Google ads. The terms that Google have for running their ads include the following:

"You shall not, and shall not authorize or encourage any third party to engage in any action or practice that reflects poorly on Google or otherwise disparages or devalues Google’s reputation or goodwill."

I know I'm too writing on a Google platform, but I don't find mentioning this to be in contradiction with the above term. The spree killer site has been around for at least few years, so there has been enough time to notice what it's about. It still probably doesn't mean that Google exactly condones the content, but maybe it should follow its unique slogan "Don't be evil" in a more active fashion in terms of sites like these. As for the other organizations, individuals and media, that same slogan is worth pursuing for them as well. After all, even if questionable content or questionable marketing may sometimes be worthwhile in the short run or from a certain point of view, such a thing as bad publicity still exists.

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The myth of an efficient market, part 3/3: Actual markets

In the previous part I described the preconditions for perfect market efficiency. In principle even with all its shortcomings, a market could get close to perfect efficiency even if none of the preconditions are really met. But has it been like this in the real-life markets? How have the markets acted in every day situations or under special circumstances? How would this manifest itself as a percentage? And will the market of the future be different from the market of today?

Examples from the last decade

Let's have a look at the recent history. Even though it's an extreme example, it's hard not to mention the dot-com bubble. Normally when a company has a 10% possibility of being worth 100 billion in the long run, and 90% possibility of failing miserably and being worth nothing, its value should be about 10 billion. However in the dot-com bubble the value in a case like this was often closer to that best-case scenario. Thus, during the dot-com bubble many companies were overvalued with a percentage of thousands or even tens of thousands. This could be seen not only in the valuations of single stocks but also very strongly on the index level. Less technology-driven indices had much less of a bubble, but for example NASDAQ was overvalued by hundreds of percent.

Then there's the current crisis that started from the U.S. housing market. Before the crisis stock prices rose to ungroundedly high levels, from which they dove to levels so low that they were even less founded on reality. One of the reasons for the gravity of the dip must have partially been in the efficiency factor number 4: external economical factors. Due to these special circumstances also many small investors saw an excellent opportunity buy shares at very low prices.

Moreover, the way this crisis has affected the European economy with all its troubled national economies starting from Greece, is also largely caused by market inefficiency. Had the debt market functioned efficiently, Greece would have had to pay higher interest for its loans many years earlier. But this never happened until it really had to happen. Greece was deceitful when joining the EMU and as a euro country it got cheaper loans than it should have received based on its economy. Since it took much longer to get to the point of rising interest rates, the economical fall is now of course a lot worse.

Everyday situations

In addition to the aforementioned episodic examples there are many more customary situations, where inefficiency is evident. The human restrictions related to time become obvious, when companies announce their quarterly reports. It's not uncommon that the first reaction will be disappointment eg. from too low quarterly earnings, due to which the stock price will plummet, but after the report is analyzed properly, the more essential factors start looking good, and the price will rise. Or the whole thing the other way around. Of course this is extremely short-term deviation, but what makes it interesting is that a quarterly report can set the price course for a significantly longer period of time. The price may slowly change in one direction, even if no new concrete information is brought to attention, and before the next quarterly report is announced, a plummet of 5% may have changed to a rise of 30%. Of course one could argue that the knowledge of absence of news is also knowledge. This is true, but it rarely justifies any significant price changes. All this can be seen as shortcomings in the efficiency preconditions 1-3 and 5.

In addition to these there are other generally recognized phenomena such as the May phenomenon - which can be summarized by the sentence "sell in may and go away", which somewhat applied to this year as well. Stocks with cheap key figures (which are commonly called value stocks) have also usually given better results than "growth stocks". If the markets truly were efficient, this couldn't be true.

Stock prices also more or less constantly vary without any clear reason. Of course given the extremely complex world and web of knowledge around us, this could be justified by new small pieces of knowledge. In practice the situation of the company or the market still shouldn't change significantly by minute.

A special case are stocks that are particularly involatile and may have very large spreads between their sell and buy assignments. Here's a graph of a small cap OMX-H stock that suddenly rocketed 20% on 24.11.2010 from 17 euro to over 21 without any apparent reason. From the perspective of a regular private investor the change was also significant with a worth of over 30 000 euro. After that the spread was also that huge. Next day the price almost plummeted back to its earlier level, which means that the seller did a good deal there. Of course this is just a small stock in a somewhat peripheric market, but still shows an example of how unefficient the market can be.

The percentual efficiency of the market

So what do we get, when we look at all the practical data we have and try to put it into the the formula given in the first part? It's fair to assume that under full efficiency a stock market index should have a quite steady and balanced progress - not a straight line but not that far from it either. Still, also in an efficient market the stocks of individual companies would of course vary more than the entire index. Thinking like this, the efficiency of many stock market indices would have gone down to something like 30-40% during the dot-com bubble. By using some kind of more merciful weighting methods the efficiency could have been a bit more, around 50%, but that's still very inefficient.

The more recent bubble and recession don't seem much more efficient either. Even though the market started to be more aware of all the problems and risks related to the subprime loans, the market still continued its bullish trend for a while. In the end, most major indices, like DAX, NASDAQ and Dow Jones had gone down over 50% percent from their peaks reaching a bottom from which they have afterwards recovered close to 100% in two years reaching almost the level before the crisis! Of course unlike with the dotcom-bubble there are now more real issues instead of just extreme speculation about huge future profits. Still, even as the western economies are still facing severe problems, the course of events is extremely hard to consider as being even close to efficient. From overvaluation the situation progressed to a clear undervaluation, and once again, depending on the weighting method and other factors the efficiency levels might have been just a bit over 50 percent in many markets.

When thinking about efficiency on a more general level, we should of course consider a longer period of time. Between overvaluation and undervaluation there needs to be a moment when the stock market index momentarily "fully reflects all information". When the index is close to this level, the misvaluations of individual stocks take a bigger role in the overall efficiency. The stocks that are most actively bought and sold are usually of course relatively more efficiently priced as well, and when defining overall effectiveness these could actually have a bigger weight in it. Still, even if this would make the stock selection efficiency (in other words the relative price of different stocks, when comparing them with each other) have an efficiency of let's say 90 percent, the overreactions in the turns of economic trends seem so big that this would still make the overall efficiency much lower to about 70 percent.

When you consider Fama's efficiency forms more like layers as I suggested in the definition part, there is the possibility that efficiency on the information layer would in fact be stronger than efficiency on the psychologic-speculative layer. If the market pricing is divided into macro and micro level efficiencies (in other words the efficiency to detect the business cycle correctly and the efficiency to detect the price of a single stock correctly respectively), the psychologic-speculative layer can be considered as taking a bigger role as a cause for inefficiency on the macro level than it does on the micro level. Still, in practice the layers cannot be fully separated: even if the role of psychology and speculation grows, information efficiency always has a significant part in all of it. Nevertheless, if security pricing inefficiency on the macro level is enough to lower the efficiency to a level of 70 percent, one cannot neglect the non-informational causes for inefficiency.

True efficiency or just human efficiency?

It's probably clear by now that I don't find the market particularly efficient. Still, the level of efficiency is largely a matter of how you define "full reflection of all information". For a full reflection just having a large group of people isn't enough: all information will never be fully reflected in all prices. Still, the information could in principle be reflected to the extent that no individual could ever outperform the market. In practice, as long as the investment decisions are done by humans instead of machines, not even this can be possible. The reason for this is that then there would be no motivation to explore investment possibilities, and that in itself would already lower the overall efficiency from this level that would be humanly efficient.

I suppose when people talk about market efficiency, they are in fact talking about this human efficiency, even though in my opinion "the full reflection of all information" would require a lot more. In principle we can distinguish three different levels of efficiency. From the weakest to the strongest they are as follows:

The actual current market efficiency

< Theoretical full human efficiency

< Theoretical real full efficiency

Even the full human efficiency would already require a huge and extremely efficient organization without any personal goals to evaluate the prices of even the smallest of stocks. In addition the efficiency prerequisites 4 and 5 should always apply, since an individual investor can block these factors. If human efficiency would be for example 75% and the actual market efficiency 65% of the theoretical real full efficiency, the actual market efficiency compared to the human efficiency would be 87%. At good times this efficiency could reach even the 95% that was mentioned in the introduction.

Are the markets getting more efficient?

In practice the market is always wrong - it's only a matter of how wrong it is and how easy it is to pinpoint this error. There may be even big efficiency differences between different indices or markets and in somewhat peripheric indices like the Helsinki OMX-H the efficiency is probably lower than in bigger indices. As time passes efficiency might also grow. For example as the awareness of the January and May phenomena has grown, their effect may have become lower - or on the other hand sometimes these can be seen as self-fulfilling prophecies which would actually result in the opposite. What's more important, however, is that internet with all its information, interaction and the ease of trade should create a certain kind of intelligence of the masses. On the other hand as the amount of players on the playground grows, so might the amount of fools and lemming behaviour.

The dynamics of efficiency will probably still experience many changes. Information efficiency will still probably grow at least in terms of information available. However, as the world economy has become more and more connected, there is always a need for even more information and a possibility for more unexpected emotional bursts. Whereas movie critics for example evaluate a static fully finished product, the different parties in the stock market need to evaluate a constantly living, massive and hugely dynamic web of securities. And what's more, these stock market "critics" - investors, analysts and media - all live in interaction with the market, which in turn may cause self-fulfilling speculation and chain reactions.

All "critic parties" influence the market movement not only in the price formation of securities but also in the real economy. Thus, even absurd and originally inefficient psychologic-speculative reactions may through their own influence result in those reactions being partially sound and even expressing efficiency in a way. When you end up in a market that's been hit by a overreaction, even the tiniest straw can then break the back of that psychological camel, and once again the the entire market will turn from bull to bear or vice versa, and all this affects the real economy as well.

In a way, in addition to business cycles, one could define efficiency cycles. When efficiency gets too low, the motivational precondition for efficiency will get higher, and efficiency will grow. And when efficiency gets too high, the motivation gets lost and inefficiency takes over. By evaluating how efficient the market at a given time is, an investor might get clues on how worthwhile it is to investigate various investment possibilities. When efficiency gets low, it's time to strike.

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