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In 9 Tweets, Marc Andreessen Explains How Bubbles Happen

Marc andreessenMarc Andreessen, co-founder and general partner of Andreessen Horowitz, speaks during the ‘The Future of Technology’ panel at the Fortune Tech Brainstorm 2009 in Pasadena, California July 22, 2009.

The efficient markets hypothesis (EMH) is one of the more controversial theories on how the financial markets work.

Popularised by Nobel-prize winning economist Eugene Fama, the EMH basically argues that all available information at any given time is priced into the market. And therefore, it’s almost impossible to try to invest in a way to beat the market.

Folks like Vanguard’s Jack Bogle and Nobel-prize winning economist Robert Shiller disagree with the EMH because it essentially denies the existence of asset bubbles.

With high-priced momentum stocks like Twitter and Groupon crashing lately, people are once again suggesting that we are seeing a failure of the EMH.

To that, famed venture capitalist Marc Andreessen offers a couple of Tweets.

Andreessen explains that the current price of a company is often factored into the valuation model for that company. And as George Soros’ theory of reflexivity posits, you basically get a feedback loop that can cause prices to keep going in one direction or another.

Because of this relationship, “prices drive the creation of theories” that explain the moves.

“Therefore a boom in theories of how everything’s a bubble and certain to crash is evidence of a cyclical bottom, not a cyclical top,” he says. “Therefore Efficient Market Hypothesis is correct if for “all information” you substitute “all information, theories, noise, and bullsh*t”.”

With that conclusion, Andreessen is more or less bridging the gap between Fama and Shiller.

Here are all of Andreessen’s tweets.










Disclosure: Marc Andreessen is an investor in Business Insider.

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