Simone Polillo, “How Markets Became Unpredictable”

In what reads like a paradox, the efficient-market hypothesis—one of the central theories of financial economics—states that the behavior of financial markets is unpredictable. As the notorious quip goes, a blindfolded monkey would do better than a group of experts in selecting a portfolio of securities, simply by throwing darts at the financial pages of a newspaper. How did such a hypothesis come to be so influential in the field of financial economics? How did financial economists turn lack of evidence about systematic patterns in the behavior of financial markets into a foundational approach to the study of finance, one that, in time, would win its main proponent Eugene Fama a Nobel prize? How did they come to believe numbers that, by making financial markets seem devoid of human agency, limited their ability to understand how markets change over time?

How Markets Became Unpredictable answers these questions in order to help the reader better understand how and why evidentiary standards in the discipline of financial economics developed in a way conducive to the ascent of the efficient-market hypothesis. Understanding the conditions behind the success of the efficient-market hypothesis, I hope, will also shed light on the social processes of knowledge-making in general, as well as the diverse pathways numbers can take to inform knowledge. Understanding what happens when data-driven knowledge becomes the driving source of creativity in a field, will generate new, more general theoretical insights regarding the role of quantification in contemporary society.