1. CHAPTER 11 The Efficient Market Hypothesis

2. Topics Definition of Market Efficiency –Random walk process –Rapid price adjustment –Incapable of beating the market Three forms of market efficiency –Weak-from Technical analysis –Semi-strong form Event studies and Anomalies –Strong-form Insider trading Active versus passive management Mutual fund performance 2

3. Market Efficiency Means… If the market is efficient, changes in stock price follows random walk process - the theory that changes in security prices occur randomly. So, there is no way to know where prices are headed. Prices are as likely to go up as to go down on any particular day. When there is no discernable pattern to the path that a stock price follows, then the stock’s price behavior is largely consistent with the notion of a random walk. Maurice Kendall (1953) found no predictable pattern in stock prices. 3

4. Random Walks and Stock Prices 4

5. Market Efficiency Means… What makes changes in stocks prices follow random walk process then? –New information (earning surprises, M&As, and upgrades/downgrades) arrives in the market unpredictably. –Information is widely available to all investors and is free/easy to obtain. –Stock prices that change in response to new (unpredictable) information also must move unpredictably. –Therefore, stock price changes follow a random walk. This means that a historical pattern of stock prices is not a good indicator for the future performance. –“Today's price is no good for forecasting tomorrow's price.” 5

6. Market Efficiency Means… If the market is efficient, stock prices respond quickly to changes (or new information) in the current situation. This may occur because a large number of competing profit- maximizing investors analyze and value securities, each independently of the others, and adjust security prices rapidly to reflect the effect of new information. Information is widely available to all investors and is free/easy to obtain. As a result, investors react quickly and accurately to new information, causing prices to adjust and current market price reflect all available information about a security and the expected return based upon this price is consistent with its risk. Therefore, securities are normally in equilibrium and are “fairly priced.” 6

7. Price Adjustments to New Information 7

8. Cumulative Abnormal Returns Before Takeover Attempts: Target Companies 8

9. Stock Price Reaction to CNBC Reports 9

10. Market Efficiency Means …. A basic question: Can you, as an investor, consistently “beat the market?” It may surprise you to learn that evidence strongly suggests that the answer to this question is “probably not.” If the market is efficient, it is not possible to “beat the market” (except by luck or insider information). We show that even professional money managers have trouble beating the market. 10

11. “Beating the Market” means… Hard to beat the average market perofrmance on a risk- adjusted basis consistently. Earning a higher return is not necessarily outperforming the market. Considering risk is also important. –For example, if your portfolio with a beta of 3 returned 20%, as opposed to Vanguard 500 Index Fund with a beta of 1 yielded 15% for a given year, your portfolio did not necessary beat the market. This is why we need to measure the excess return. –The excess return on an investment is the return in excess of that earned by other investments that have the same risk. –“Beating the market” means consistently earning a positive excess return. 11

12. The Driving Force Toward Market Efficiency: Why Would a Market be Efficient? The driving force toward market efficiency is simply competition and the profit motive that drive prices to reflect information. Information-gathering is motivated by desire for higher investment returns. –Even a relatively small performance enhancement can be worth a tremendous amount of money. –1% increase in performance of $1 billion fund = $10 million –So, a portfolio manager is willing to spend up to $10 million for research to improve 1% gain. This creates incentives to unearth relevant information and use it. 12

13. Efficient Market Hypothesis (EMH) The Efficient market hypothesis (EMH) is a theory that asserts: –The major financial markets reflect all relevant information at a given time — the type and source of information with which it is reflected in prices. Levels of the EMH –Weak Form EMH –Semi-strong Form EMH – most realistic –Strong Form EMH 13

14. Forms of Market Efficiency 14

15. Three Forms Of Market Efficiency Weak Form Financial asset (stock) prices incorporate all historical information into current prices. Past stock price changes cannot help you predict future price changes. Semi-strong Form Stock prices incorporate all publicly available information (historical and current). Information in an SEC filing is incorporated into a stock price as soon as it is made public. Strong Form Stock prices incorporate all information, private as well as public. Prices react as soon as new information is generated. 15

16. Weak form

17. Forms of Market Efficiency (i.e., what information is used?) A Weak-form Efficient Market is one in which past prices and volume figures are of no use in predicting future stock price changes and beating the market because current prices reflect all historical information. –If so, then technical analysis is of little use. –If so, then one should simply use a buy-and-hold strategy. 17

18. Evidence Supporting Weakly Efficient Hypothesis Research shows that security prices tend to reflect all historical information, –Which is easy to obtain and cheap. However, there are technical analysts using graphs and statistics. –Technical analysis: Using a past price data and other nonfinancial data to identify future trading opportunities, often using charts, so those analysts are called “chartists.” –Technicians focus on past security prices. –Look for meaningful trends in historical security prices. –Attempt to extract predictions from whatever patterns they find` such as using a filter rule (in next slide). 18

19. Technical Analysis: Filter Rules An X% filter is a mechanical trading rule –If a security’s price rises by at least X%, buy and hold until the price peaks and falls by at least X% –When price decreases from a peak level by X%, liquidate long position and sell short –Hold short position until price reaches a low point and then begins to rise –If (when) the price rises above X%, cover the short position and go long If stock prices fluctuate randomly, filter rules should not outperform randomly chosen stocks. In general, filter rules generate large commissions (especially those with small X values) –After deducting for commissions, filter rules do not outperform naïve buy- and-hold strategy –Some filters result in large net losses after deducting commissions 19

20. Using a 10% Filter Rule to Trade a Security 20

21. Does Old Information Help Predict Future Stock Prices? Researchers have used sophisticated techniques to test whether past stock price movements help predict future stock price movements. –Some researchers have been able to show that future returns are partly predictable by past returns. BUT: there is not enough predictability to earn an excess return. –Also, trading costs swamp attempts to build a profitable trading system built on past returns. –Result: buy-and-hold strategies involving broad market indexes are extremely difficult to outperform. –No matter how often a particular stock price path has related to subsequent stock price changes in the past, there is no assurance that this relationship will occur again in the future. 21

22. Past Performance is No Guarantee of Future Results! 22

23. Weak-Form Tests, I Returns over the short horizon –Serial correlation: Tendency for stock returns to be related to past returns. –Some studies find a relatively weak but positive serial correlation over short-term periods. –Jegadeesh and Titman (1993) found a strong positive correlation for particular market sectors or portfolios. –This supports a momentum trading strategy; Momentum: Good or bad recent performance continues over short to intermediate time horizons 23

24. Weak-Form Tests, II Returns over long horizons –A multi-year study found a pronounced negative long- term serial correlation. –Episodes of overshooting followed by correction: Stock market might overreact to relevant news. Such overreaction leads to positive serial correlation over short-term horizon. Subsequent correction of the overreaction leads to poor performance following good performance and vice versa. 24

25. Semi-strong form

26. Semistrong-form EMH A Semistrong-form Efficient Market is one in which publicly available information is of no use in beating the market because current security prices reflect all public information. –If so, then fundamental analysis is of little use, but “inside” information may be illegally valuable. –Any price anomalies are quickly found out and the stock market adjusts accordingly. 26

27. Fundamental Analysis Fundamental Analysis - using economic and accounting information to predict stock prices –Try to find firms that are better than everyone else’s estimate. –Try to find poorly run firms that are not as bad as the market thinks. –If the semi strong form efficiency is prevalent, fundamental analysis is not useful in beating the market. 27

28. How New Information Gets into Stock Prices Stock prices change when traders buy and sell shares based on their view of the future prospects for the stock. But, the future prospects for the stock are influenced by unexpected news announcements. –Such as unexpected earnings increase, unexpected dividend cuts, and unexpected lawsuits over company practices. Prices could adjust to unexpected news in three basic ways: –Efficient Market Reaction: The price instantaneously adjusts to the new information. –Delayed Reaction: The price partially adjusts to the new information. –Overreaction and Correction: The price over-adjusts to the new information, but eventually falls to the appropriate price. 28

29. Over-reaction, Efficient Reaction, and Delayed Reaction 29

30. Event Studies, I. Researchers have examined the effects of many types of news announcements on stock prices. To test for the effects of new information on stock prices, researchers use an approach called an event study. Event studies that examine how fast stock prices adjust to specific significant economic events. If the market is efficient, it would not be possible for investors to experience superior risk-adjusted returns by investing after the public announcement and paying normal transaction costs. Let us look at how researchers use this method. We will use a dramatic example. 30

31. Event Studies, II. On Friday, May 25, 2007, executives of Advanced Medical Optics, Inc. (EYE), recalled a contact lens solution called Complete MoisturePlus Multi Purpose Solution. Advanced Medical Optics took this voluntary action after the Centers for Disease Control and Prevention (CDC) found a link between the solution and a rare cornea infection. EYE Executives chose to recall their product even though no evidence was found that their manufacturing process introduced the parasite that can lead to cornea infection. Further, company officials believed that the occurrences of cornea infection were most likely the result of end users who failed to follow safe procedures when installing contact lenses. On Tuesday, May 29, 2007, EYE shares opened at $34.37, down $5.83 from the Friday closing price. 31

32. Event Studies, III. 32

33. Event Studies, IV. When researchers look for effects of news on stock prices, they must make sure that overall market news is accounted for in their analysis. To separate the overall market from the isolated news concerning Advanced Medical Optics, Inc., researchers would calculate abnormal returns. The abnormal return due to the event is the difference between the stock’s actual return and a proxy for the stock’s return in the absence of the event. Abnormal return = Observed return – Expected return 33

34. Event Studies, V. How Tests Are Structured The expected return is calculated using a market index (like the Nasdaq 100 or the S&P 500 Index) or by using a long-term average return on the stock. Market Model approach: Excess (or Abnormal) Return = Observed - Expected e t = r t - (a + br Mt ) 34

35. Event Studies, VI. Researchers are interested in: The adjustment process itself The size of the stock price reaction to a news announcement. Researchers then align the abnormal return on a stock to the days relative to the news announcement. –Researchers usually assign the value of zero to the news announcement day. –One day after the news announcement is assigned a value of +1. –Two days after the news announcement is assigned a value of +2, and so on. –Similarly, one day before the news announcement is assigned the value of -1. 35

36. Event Studies, VII. According to the EMH, the abnormal return today should only relate to information released on that day. To evaluate abnormal returns, researchers usually accumulate them over a 60 or 80-day period. A plot of cumulative abnormal returns for Advanced Medical Optics, Inc. beginning 40 days before the announcement. –The first cumulative abnormal return, or CAR, is just equal to the abnormal return on day -40. –The CAR on day -39 is the sum of the first two abnormal returns. –The CAR on day -38 is the sum of the first three, and so on. –By examining CARs, researchers can see if there was over- or under- reaction to an announcement. 36

37. Event Studies, VIII. 37

38. Event Studies, IX. As you can see, Advanced Medical Optics, Inc.’s cumulative abnormal return hovered around zero before the announcement. After the news was released, there was a large, sharp downward movement in the CAR. The overall pattern of cumulative abnormal returns is essentially what the EMH would predict. That is: –There is a band of cumulative abnormal returns –A sharp break in cumulative abnormal returns, and –Another band of cumulative abnormal returns. 38

39. Semistrong Tests: Anomalies We will now present some aspects of stock price behavior that are both baffling and potentially hard to reconcile with market efficiency. –Researchers call these market anomalies. Critics of market efficiency points out these anomalies as an evidence of market inefficiency. Anomalies: –Small Firm Effect (January Effect) –P/E Effect –Neglected Firm Effect and Liquidity Effects –Book-to-Market Ratios –Post-Earnings Announcement Price Drift 39

40. Anomalies The Size Effect: The small firms consistently experienced significantly larger risk-adjusted returns than large firms. The P/E Ratio Effect: Low P/E stocks experienced superior risk-adjusted results relative to the market. The Book-to-Market Ratio Effect: A high B/M stocks is positively correlated with future stock returns. Remember these information are publicly available. If these anomalies are persistent, it is in conflict with the EMH. 40

41. The Size Effect 41

42. Anomalies, The Day-of-the-Week Effect The day-of-the-week effect refers to the tendency for Monday to have a negative average return—which is economically significant. 42

43. Anomalies, The Amazing January Effect, I. The January effect refers to the tendency for small-cap stocks to have large returns in January. Does the January effect exist for the S&P 500 or large stocks? –It does not appear so. 43

44. Anomalies, The Amazing January Effect, II. But, what do we see when we look at returns on small-cap stocks? Critics of market efficiency point to sizable gains to be had from simply investing in January and ask: –How can an efficient market have such unusual behavior? –Why don’t investor take advantage of this opportunity and thereby drive it out of existence? 44

45. Anomalies, The Amazing January Effect, III. The January Effect is partially understood. –Tax-loss selling: Sell losing stocks in December to realize capital loss to offset capital gain earned from winning stocks to reduce tax obligations, and buying back in January. –“Window dressing”: Institutional investors have an incentive to sell stocks that do poorly at the end of year to make their year- end performance look good. 45

46. The Book-to-Market Ratio Effect 46

47. Cumulative Abnormal Returns in Response to Earnings Announcements 47

48. Past-Earnings-Announcement Price Drift The abnormal return is positive for positive-surprise firms and negative for negative-surprise firms. The cumulative abnormal returns of positive-surprise stocks continue to rise-in other words, exhibit momentum-even after the earnings information becomes public. The sluggish price adjustment to earnings-surprises appears to be a violation of market efficiency. 48

49. Interpreting the Anomalies The most puzzling anomalies are price-earnings, small-firm, market-to-book, momentum, and long- term reversal. –Fama and French argue that these effects can be explained by risk premiums. –F&F argues that these factors are simply proxies for risk. –However, Lakonishok, Shleifer, and Vishney argue that these effects are evidence of inefficient markets. Anomalies or data mining? –Some anomalies have disappeared after publicly announced.. –Book-to-market, size, and momentum may be real anomalies. –Value stock – defined by low P/E ratio, high-book-to market ratio, or depressed prices relative to historic levels – seem to have provided higher average returns than “glamour” or growth stocks. 49

50. Returns to Style Portfolio as a Predictor of GDP Growth 50

51. Strong-form

52. Forms of Market Efficiency (i.e., what information is used?) A Strong-form Efficient Market is one in which information of any kind, public or private, is of no use in beating the market because prices reflect all public and private information. –If so, then “inside information” is of little use. –This assumes perfect markets in which all information is cost-free and available to everyone at the same time. 52

53. Who is an “Insider”? More Comprehensive Definition For the purposes of defining illegal insider trading, an insider is someone who has material non-public information. Such information is both not known to the public and, if it were known, would impact the stock price. A person can be charged with insider trading when he or she acts on such information in an attempt to make a profit. 53

54. Strong-Form Tests: Inside Information If a market is strong-form efficient, no information of any kind, public or private, is useful in beating the market. But, it is clear that significant inside information would enable you to earn substantial excess returns. This fact generates an interesting question: Should any of us be able to earn returns based on information that is not known to the public? The ability of insiders to trade profitability in their own stock has been documented in studies by Jaffe, Seyhun, Givoly, and Palmon. 54

55. Insider Trading In the U.S. (and in many other countries) it is illegal to make profits on non-public information. –It is argued that this ban is necessary if investors are to have trust in U.S. stock markets. –The United States Securities and Exchange Commission (SEC) enforces laws concerning illegal trading activities. It is important to be able to distinguish between: –Informed trading –Legal insider trading –Illegal insider trading 55

56. Informed Trading When an investor makes a decision to buy or sell a stock based on publicly available information and analysis, this investor is said to be an informed trader. The information that an informed trader possesses might come from: –Reading the Wall Street Journal –Reading quarterly reports issued by a company –Gathering financial information from the Internet –Talking to other investors 56

57. Legal Insider Trading Some informed traders are also insider traders. When you hear the term insider trading, you most likely think that such activity is illegal. But, not all insider trading is illegal. –Company insiders can make perfectly legal trades in the stock of their company. –Corporate insiders include major corporate officers, directors, and owners of 10% or more of any equity class of securities. –They must comply with the reporting rules made by the SEC. For example, insiders must report to the SEC each month on their transactions in the stock of the firm for which they are insiders, and these insider trades are made public by the SEC. –In addition, corporate insiders must declare that trades that they made were based on public information about the company, rather than “inside” information. 57

58. Illegal Insider Trading When an illegal insider trade occurs, there is a tipper and a tippee. –The tipper is the person who has purposely divulged material non-public information. –The tippee is the person who has knowingly used such information in an attempt to profit. It is difficult for the SEC to prove that a trader is truly a tippee. It is difficult to keep track of insider information flows and subsequent trades. –Suppose a person makes a trade based on the advice of a stockbroker. –Even if the broker based this advice on material non-public information, the trader might not have been aware of the broker’s knowledge. –The SEC must prove that the trader was, in fact, aware that the broker’s information was based on material non-public information. Sometimes, people accused of insider trading claim that they just “overheard” someone talking. Be aware: When you take possession of material non-public information, you become an insider, and are bound to obey insider trading laws. 58

59. It’s Not a Good Thing: What did Martha do? (Part 1) The SEC believed that Ms. Stewart was told by her friend, Sam Waksal, who founded a company called ImClone, that a cancer drug being developed by ImClone had been rejected by the Food and Drug Administration. This development would be bad news for ImClone shares. Martha Stewart sold her 3,928 shares in ImClone on December 27, 2001. –On that day, ImClone traded below $60 per share, a level that Ms. Stewart claimed triggered an existing stop-loss order. –However, the SEC believed that Ms. Stewart illegally sold her shares because she had information concerning FDA rejection before it became public. The FDA rejection was announced after the market closed on Friday, December 28, 2001. This news was a huge blow to ImClone shares, which closed at about $46 per share on the following Monday (the first trading day after the information became public). 59

60. It’s Not a Good Thing: What did Martha do? (Part 2) In June 2003, Ms. Stewart and her stock broker, Peter Bacanovic, were indicted on nine federal counts. They both plead not guilty. Ms. Stewart’s trial began in January 2004. Just days before the jury began to deliberate, however, Judge Miriam Cedarbaum dismissed the most serious charge of securities fraud. Ms. Stewart, however, was convicted on all four counts of obstructing justice. –Judge Cedarbaum fined Ms. Stewart $30,000 and sentenced her to five months in prison, two years of probation, and five months of home confinement. –The fine was the maximum allowed under federal rules while the sentence was the minimum the judge could impose. –Peter Bacanovic, Ms. Stewart's broker, was fined $4,000 and was sentenced to five months in prison and two years of probation. So, to summarize: Martha Stewart was accused, but not convicted, of insider trading. Martha Stewart was accused, and convicted, of obstructing justice. 60

61. Mutual fund performance

62. Active or Passive Management Active Management –An expensive strategy because of more frequent rebalancing to pursue to beat the market. –Suitable only for very large portfolios Passive Management –Accept EMH, and therefore, passive portfolio managers will NOT attempt to outsmart the market. –Buying index funds and ETFs is a sensible thing to do. –Very low costs because turnover or portfolio rebalancing is low. 62

63. Mutual Fund Investment Performance: A First Look Performance of actively managed funds: –below the return on the Wilshire index in 23 of the 39 years from 1971 to 2009 –The average annual return on the index was 11.9%, which was greater that that of the average mutual fund. –Evidence for persistent superior performance (due to skill and not just good luck) is weak, but suggestive – refer to the Malkiel studies. –Bad performance more likely to persist 11-63

64. Diversified Equity Funds versus Wilshire 5000 Index 11-64

65. Consistency of Investment Results 11-65

66. Mutual Fund Performance: Cautions While looking at historical returns, the riskiness of the various fund categories should also be considered. Whether historical performance is useful in predicting future performance is a subject of ongoing debate. Some of the poorest-performing funds are those with very high costs. Ratings by reputable research firm such as Morningstar are as good indicator for the future performance as anyone’s guess. 66

67. Mutual Fund Performance: The Model to Evaluate The conventional performance benchmark today is a four-factor model, which employs: –the three Fama-French factors (the return on the market index, and returns to portfolios based on size and book-to-market ratio) –plus a momentum factor (a portfolio constructed based on prior-year stock return). 67

68. Estimates of Individual Mutual Fund Alphas, 1993 - 2007 68

69. Mutual Fund Performance: The Hot Hands Phenomenon Consistency, the “hot hands” phenomenon –Carhart – weak evidence of persistency –Bollen and Busse – support for performance persistence over short time horizons –Berk and Green – skilled managers will attract new funds until the costs of managing those extra funds drive alphas down to zero. 69

70. Risk-adjusted performance in ranking quarter and following quarter 70

71. Mutual Fund Performance: Summary The evidence on the risk-adjusted performance of professional managers is mixed at best. The performance of professional managers as a group beat or are beaten by the market fall within the margin of statistical uncertainty. Performance superior to passive strategies is far from routine. On the other hand, a small number of investment superstars–Peter Lynch, Warren Buffett among then–have consistently beaten the market. However, the records of the vast majority of professional money managers offer convincing evidence that there are no easy strategies to guarantee success in the securities markets. There will be a smaller role for professional money managers than we originally thought. It makes little sense to time the market. 71

72. Market Efficiency and the Performance of Professional Money Managers, I. 72

73. Market Efficiency and the Performance of Professional Money Managers, II. Previous slides show the percentage of managed equity funds that beat the Vanguard 500 Index Fund. –In only 14 of the 30 years (1980—2009) did more than half beat the Vanguard 500 Index Fund, when measured with one-year returns. –The performance is worse when it comes to a 10-year investment periods (1980-1989 through 2000-2009). –When measured with ten-year returns, in only 3 of these 21 investment periods, did more than half the professional money managers beat the Vanguard 500 Index Fund. Conclusion –In the previous table, the performance of professional money managers is generally poor relative to the Vanguard 500 Index Fund. In addition, the performance declines the longer the investment period. 73

74. Market Efficiency and the Performance of Professional Money Managers, III. The performance of professional money managers is especially troublesome when we consider the enormous resources at their disposal and the substantial survivorship bias that exists. –Managers and funds that do especially poorly disappear. –If it were possible to beat the market, then the process of elimination should lead to a situation in which the survivors can beat the market. –The fact that professional money managers seem to lack the ability to outperform a broad market index is consistent with the notion that the equity market is efficient. The previous slides raise some potentially difficult and uncomfortable questions for security analysts and other investment professionals. –If markets are inefficient, and tools like fundamental analysis are valuable, why can’t mutual fund managers beat a broad market index? 74

75. What is the Role for Portfolio Managers in an Efficient Market? Even if the market is efficient a role exists for portfolio management: to build a portfolio to the specific needs of individual investors. –Diversification: A basic principle of investing is to hold a well-diversified portfolio. –However, exactly which diversified portfolio is optimal varies by investor. –Some factors that influence portfolio choice include the investor’s age, tax bracket, risk aversion, and even employer. Employer? Suppose you work for Starbucks and part of your compensation is stock options. Like many companies, Starbucks offers its employees the opportunity to purchase company stock at less than market value. You can imagine that you could wind up with a lot of Starbucks stock in your portfolio, which means you are not holding a diversified portfolio. The role of your portfolio manager would be to help you add other assets to your portfolio so that it is once again diversified. 75

76. So, are markets efficient?

77. Are Financial Markets Efficient? Financial markets are the most extensively documented of all human endeavors. Colossal amounts of financial market data are collected and reported every day. These data, particularly stock market data, have been exhaustively analyzed to test market efficiency. But, market efficiency is difficult to test for various reasons. 77

78. Are Financial Markets Efficient? (Cont’d) Nevertheless, three generalities about market efficiency can be made: –Short-term stock price and market movements appear to be difficult to predict with any accuracy. –The market reacts quickly and sharply to new information, and various studies find little or no evidence that such reactions can be profitably exploited. –If the stock market can be beaten, the way to do so is not obvious. 78

79. Are Financial Markets Efficient? (Cont’d) The performance of professional managers is broadly consistent with market efficiency. Most managers do not do better than the passive strategy. There are, however, some notable superstars: –Peter Lynch, Warren Buffett, John Templeton, George Soros 79

80. Are Financial Markets Efficient? (Cont’d) Magnitude Issue –Only managers of large portfolios can earn enough trading profits to make the exploitation of minor mispricing worth the effort. Selection Bias Issue –Only unsuccessful investment schemes are made public; good schemes remain private. Lucky Event Issue –There is always one or two investors (out of million investors) who accomplishes a superior return in a given year and get publicized more often than those unsuccessful investors. 80

81. Other Issues, I. Resource Allocation If markets were inefficient, resources would be systematically misallocated. –Firm with overvalued securities can raise capital too cheaply. –Firm with undervalued securities may have to pass up profitable opportunities because cost of capital is too high. 81

82. Other Issues, II. Bubbles Bubbles and market efficiency –Prices appear to differ from intrinsic values. –Rapid run up followed by crash –Bubbles are difficult to predict and exploit. 82

83. Other Issues, III. Stock Market Analysts Some analysts may add value, but: –Difficult to separate effects of new information from changes in investor demand –Findings may lead to investing strategies that are too expensive to exploit 83