Investments, tenth edition

  The Selection Bias Issue   

Suppose that you discover an investment scheme that 

could really make money. You have two choices: either publish your technique in  The 

Wall Street Journal  to win fleeting fame, or keep your technique secret and use it to earn 

millions of dollars. Most investors would choose the latter option, which presents us with 

a conundrum. Only investors who find that an investment scheme cannot generate abnor-

mal returns will be willing to report their findings to the whole world. Hence opponents 

of the efficient markets’ view of the world always can use evidence that various techniques 

do not provide investment rewards as proof that the techniques that do work simply are 

not being reported to the public. This is a problem in  selection bias;  the outcomes we are 

able to observe have been preselected in favor of failed attempts. Therefore, we cannot 

fairly evaluate the true ability of portfolio managers to generate winning stock market 

strategies.  

    11.4 

Are Markets Efficient? 

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