It was the exam question we all dreaded. Back in the mid-1990s, when I was an undergraduate at the London School of Economics, lecturers used to enjoy torturing students by posing a simple yet (to us) devastating question.
It went something like this. Given that modern economics states that it is virtually impossible to beat the markets for any extended period of time, how come Warren Buffett keeps on doing so, year after year? Does this mean finance theory is bunkum – or does it mean that Buffett cannot possibly exist, that he must instead be a figment of the media’s febrile imagination?
Needless to say, the last sentence is a slight exaggeration – but only slight. To the modern financial model-builder, if the evidence contradicts the theory to too great an extent, then the evidence must be suspect. The current collapse on Wall Street and in the City doesn’t look as surprising