The EMH is False – Specific Strong Evidence

I am going to defend the following response to “If you are so smart why aren’t you rich?”: Rationalists actually are smart but we were way too modest and did not bet on our beliefs. The rationalists who actually tried to use rationality to invest often traded extremely lucratively. We should stop being so modest moving forward. Ideas have consequences, including for asset prices. In my opinion, anyone who has been on lesswrong for a long time really should be at least financially independent

I will first present the best evidence I have that the EMH is quite false: There are currently high return trades (5% a month at least, possibly more) with extremely low risk (you can lose 1-2% max, probably less depending on execution). These trades take a little execution but do not require professionals. In the recent past, there were VERY simple bets that returned ~10% a month with even less risk. I will describe both these trades then talk about more speculative evidence.

By the EMH I mean this practical form: People cannot systematically outperform simple strategies like holding VTSAX. Certainly, you cannot expect to have a higher expected value than max(VTSAX, SPY). Opportunities to make money by active investing are either very rare, low volume, or require large amounts of work. Therefore people who are not investing professionally should just buy broad-based index funds. 

I would say that for many asset classes you should have a reasonably strong prior that the current price is correct. I would include stocks and normal sports bets. However this prior is weak enough that the standard to overcome it is basically ‘convincing argument from a friend’. It is important to approach this with the same mindset you would use to make predictions and to be reasonably detail-oriented. I am not claiming this is trivially easy to beat the market just very doable.

Post Election Trump Betting

You could lucratively bet against Donald Trump long after the election on various platforms. The most lucrative way known to me was to short ‘TRUMPFEB’ on TRUMPFEB was a token that would pay out 1$ if Trump was president on Feb 1st and 0$ if he was not. The tokens were tradeable. Importantly you could short them to bet against trump. If TRUMPFEB was selling for 8cents and you short TRUMPFEB you would essentially be betting 1 dollar to make 8cents. Here is a graph of the price over time and some specific values.

Source images:

Roughly the markets thought Trump has a 15-17% chance until Nov 22nd, ~10-11% chance until Dec 10th and ~5-6% chance until January 5th. The odds were non-trivial until the electoral college met in person. You could short TRUMPFEB with 2x leverage which let you double your returns.  You could have easily placed a million-dollar bet shorting TRUMPFEB long after the election. FTX was not available to Americans but you could have gotten somewhat less lucrative odds betting on Polymarket or catnip. Polymarket and Catnip were available to Americans. At least one rationalist I know made over 100k betting on Polymarket.  The Polymarket election market had nine figures of volume. Predictit had low limits and high fees but many other platforms did not.

Safe high return trades exist right now – Perpetual Future Arbitrage

This trade is harder to explain and trickier to execute but it does not require being a professional. A ‘perpetual future’ is a contract that mimics an underlying asset. You can buy them ‘going long’ or you can ‘sell’ them to other people by shorting. For simplicity, let’s talk about BTC and BTC-PERP. BTC-PERP is a tradeable asset that works as follows on
— Ever hour compute the average prices of BTC and BTC-PERP over the last hour

— If BTC-PERP traded higher then longs pay shorts. If BTC is higher than shorts pay longs.  

— The amount paid is 1/24th of the discrepancy (on Binance these payments trigger every 8hours and the payment is 1/3 the difference).

Here is what this looks like. The second to last is the ‘payment’ (negative means I got paid) and the last column is the hourly rate. (These are some example holdings, this is a real account but not a proposed portfolio):

Open in a new tab to actually read the image

The above account is short all the coins. 

In general Perpetuals trade above the price of the underlying coins. The underlying reason is that it is much easier to use leverage when buying perpetual futures. This effect is especially strong if the market is bullish (as it is right now). 

The way to make this into an arbitrage is to buy the underlying coin and short an equal amount of the perpetual. For example, buying Bitcoin and shorting BTC-PERP. Prices almost never differ by more than 0.2%. 

The account above has a value of around 32k. If you add up the payments you will notice I received more than five dollars in one hour. That is 840 USD or 2.65% a week. This payment is a little better than I would expect going forward but if the market remains bullish you can get 10% monthly doing these trades. I would be surprised if you could not get at least 5% returns over the next 30 days. Returns were even better a few months ago. However, rates were sane until about three months and will presumably return to sanity one day. But for now, you can grab some safe returns if you do this trade skillfully. This is not as simple as ‘bet against trump’ and you probably need some python scripts to grab funding rate data. You also need to be careful about how you enter and exit positions. There is some work involved here but it easily makes sense if you have decent amounts of capital to invest (or can somehow pool some capital). 

However the ‘work involved’ does not explain why this has not been arbitraged away as predicted by the EMH. Many large players are actually doing these trades. But at least for now, the ‘smart money’ cannot close the gaps. Markets are often inefficient for a long time. 

Backtesting Rationalist Investing

Hopefully, the previous examples have garnered me some credibility because I am about to do something very dangerous. The perp arbitrage is current and I told people to bet on the elections well ahead of resolution (I told people to bet post-election on various discords). But I think one very obvious implication of ‘rationalist thinking’ was to bet on AI progress. It was especially clear you should do this after Alphago. Conveniently Alphago came out a little over five years ago so we can check the five-year returns of some plausible AI investments:

Goog 3x 

Nvidia 15x 

AMD 30x 

Intel 2x

Tesla 14x

Microsoft 4.5x

Botz ETF (2.5x)

TSM 4x

Facebook 2.5x

QQQ (Tech sector ETF) 3x


SPY (Obvious control group) 2x

You can argue that returns are driven by ‘tech stocks did well’ but GPU stocks did much better than tech in general. And I do think its fair to assume a rational investor who was looking to bet on AI progress would have put some of their portfolio into GPU manufacturers once it became clear that the ‘more compute’ paradigm was going to be influential. Imo Alphago was a good time to be convinced of the ‘more layers’ thesis and at the time most big AI projects were trained on Nvidia GPUS. 

Much has also been made of the fact that Bitcoin was mentioned very early on lesswrong. 

I changed my mind, Now I’m feeling different

We were young
We were young
We were young, we didn’t care
Is it gone?
Is it gone?
Is it floating in the air?
I changed my mind
I changed my mind
Now I’m feeling different

All that time, wasted
I wish I was a little more delicate

I think it us usually best to focus on the strongest arguments for your case so I won’t go into various weaker ones in any depth. But I will note it is possible to lend quite safely at high rates (~20% long term, often much higher APY short term). The ‘Equity Premium Puzzle’ is also a well known anomaly. It is very hard to explain why treasury bill returns have been so low relative to stocks for over a hundred years. I mention these as examples but I ask people to stick to object level counterarguments against my main points. I have been telling people how to beat the market for months. I am telling you how right now. So it doesn’t really make sense to make meta-arguments about how the things I am saying are impossible. The object level have been laid out. 

I too once believed in the EMH but I changed my mind. The third virtue is lightness. In a few days I hope to follow this post up with a sketch of what is still available, practical advice on amateur trading and various paths forward. 

My own mistakes

I should have written about this much earlier. I did tell people to Bet on Biden pre-election but that post had many flaws such as emphasizing predictit instead of Polymarket. In addition, post-election betting was much more obviously lucrative than pre-election betting. The last few months have also been extremely lucrative because of the crypto boom. I talked about many opportunities on various discord but did not post anything systematic and did not post ‘Bet on Biden v2’ to lesswrong nor did I post about crypto. Regardless of the reception, this thread gets I should have posted the information sooner. It is notable many people thanked me for the ‘Bet on Biden’ piece and it really hurts me that I did not sound the alarm louder on later opportunities. I also believe I cost myself a large amount of money by locking myself out of good counsel. I can make various excuses but I will not do so. Maybe my living and family situations played a factor in my bad judgment. Regardless I strongly regret my behavior 

Author: deluks917

"Whatever you did for one of the least of these brothers and sisters of mine, you did for me" I am trying to help animals and increase the odds of a good future. Stereotypical nerdy transgirl. Right now interested in crypto.

5 thoughts on “The EMH is False – Specific Strong Evidence”

  1. I pretty much agree that these opportunities exist, and can be exploited.

    If you want to promote this kind of “rational investing” – have you consider starting some kind of focused community around it (probably just a Discord)? I’d love to contribute to such a community. I think other people might be interested too.


  2. I broadly agree with the thrust of your article (and have many similar trades on).

    I totally agree that we should reject the EMH as posed by you, although I think it is a bit of a strawman version. However, I do think that it makes sense to have strong priors that any given market is relatively “hard to beat” (i.e. averaged across time and liquidity weighted asset class, it requires a large amount of expertise and/or effort and/or discipline to earn better risk adjusted returns than the market).

    Part of what is going on here is that 2020-2021 has been a comparatively amazing time to try to beat the market, and crypto and prediction markets are two lower efficiency asset classes (for a variety of reasons — but mainly the barriers ). Of course, this is exactly when and where you should look! Just be careful of drawing too sweeping of conclusions from it about your abilities in other times/places. I think this is one big way where people who are successful early on often end up sputtering out, updating global skill parameters too much and then when market conditions or the asset classes you are trading change, being unable to recognize that you no longer have an edge.

    I think a lot of this comes down to “All Debates Are Bravery Debates.” For a rationalist who is well equipped in several ways to beat the market, it is probably not appropriate to claim that the market is very strongly efficient (because often times their mistake will be the opposite: trying too little to beat the market). But for the average person, it is pretty good advice. Told that it is possible to beat the market, many people will rush to buy the $2000 course of the nearest Instagram Forex trader that poses next to lambos all day, or to start trading shitcoins on 125x and lose all their money.

    PS: I know your screenshot was not a portfolio recommendation, but if you are running this trade, make sure you know how AMPL rebasing works (and how your particular exchange handles it) prior to trying carry trades on it! That one in particular, your risk is sometimes substantially greater than 2-3% when running this sort of trade.

    Liked by 1 person

    1. To be honest after talking to some people I have updated toward thinking ‘beating the market’ is a little harder than I thought. It does seem like most people, even the smart ones, have a lot of trouble saying ‘this is the real deal’ to post-election Trump without jumping into bad ideas. There is also some skill involved in being able to distinguish small probabilities in a sensible way.


  3. The perpetual futures thing seems interesting, after some looking around I’m having trouble finding a place that will let Americans do it, any suggestions?


  4. My main problem with investing effort into being smart in this dimension is that it *really* feels like something where specialization should be occurring.

    Anyway, barring that, what can I do to recieve 100% of your alarms?


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