What Trading Places teaches you about market efficiency

Still from Trading Place © Alamy

Trading Places is a 1983 comedy starring Dan Ackroyd and Eddie Murphy (pictured), and Jamie Lee Curtis. The Mortimer Brothers, who own a commodity brokerage, decide to settle an argument about nature versus nurture by having their star trader, Louis Winthorpe III (Ackroyd), framed for theft, and replaced with homeless conman Billy Ray Valentine (Murphy).

While Winthorpe goes into a drunken spiral, Valentine adapts to his new role. But when he overhears the brothers planning to fire him, he teams up with Winthorpe and a prostitute (Curtis) to bring the Mortimers down.

The key moment

Having bailed Valentine out of jail, the brothers bring him to their office to teach him how their business operates. They explain that they carry out trades in several commodities, including orange juice, wheat, pork bellies and gold, for clients. However, because they get their money through commissions on each trade, the firm profits irrespective of whether their clients win or lose. Grasping the model immediately, Valentine says: “Sounds to me like you guys are a couple of bookies”.

Lesson for investors

The idea that financial markets are a form of gambling is a favourite insult of those who dislike them. Yet it’s not a bad analogy, nor necessarily a negative one. After all, betting odds are usually reasonably correct as to the probability of an event happening – otherwise bookmakers would rapidly go bust. Similarly, markets are capable of very accurate judgments.

However, just as gamblers on a streak can behave irrationally, creating opportunities for more level-headed punters, markets also regularly lose touch with reality.

Other financial wisdom

Also in 1983, two real-life traders, Richard Dennis and William Eckhardt, had a similar bet about whether trading could be taught. Dennis selected a group of people from all walks of life, who he dubbed “the Turtles”. After several weeks of trading lessons, mostly focused on trend-following techniques, he gave them some money and let them loose.

While the group had mixed success, some were extremely successful, most notably Paul Tudor Jones (now worth an estimated $4.7bn). This suggests that, while some skills (such as discipline) are innate, it is possible to improve your results by reading and taking advice on the subject.