The efficient market hypothesis and search-engine optimization

The efficient market hypothesis (EMH) is an idea in the finance world that the market price for a commodity accurately reflects all information available at the moment. There’s little point in us trying to pick particular winning stocks, unless we have some very secret information. The best investment strategy involves diversifying risk so that results match the aggregate market changes.

It’s a very appealing idea because it means the laziest strategy is also the best.

Anyhow, I suspect that something sort of like EMH dominates the search engine world, but instead of prices for commodities at points in time, the market is search engine rankings and keywords. In my inchoate model, each keyword is its own market. The “price” of a given website would be how well it ranks in a search for that keyword.

I brought up EMH because if we view a website’s search engine ranking as a market price, and we make the assumption that search engines on average operate as efficiently as any other market, then ultimately, your site’s search engine ranking can’t really be pushed up through artificial means, for the same reason that you can’t push up stock prices artificially. I should make it clear that I mean that you can’t do it sustainably.

Hopping back into the financial world, an unfortunately common tactic is to run a pump-and-dump scam. The principle is simple — I own a whole bunch of shares of a company, and so I go out and promote the heck out of that company while at the same time I’m selling all my shares to all the suckers that I manage to convince. Meriill Lynch paid a $100 million fine a few years ago for doing this.

I get unsolicited email all the time with investment recommendations. These are sent from people running the same operation on a smaller scale.

Of course even if these efforts do let the dumper get out and make some money, once the market learns about what is really going on, the stock price craters. See what happened to Enron for one of the most famous examples of how the market reacts to information assymetry.

Getting to the point, these tactics may push up the price just long enough for the dumper to dump, but no serious stockholder would ever consider using a pump-and-dump scam as a long-run strategy to improve the price per share.

I think this is what search-engine marketers mean when they talk about how black-hat tactics don’t work in the long run and will likely backfire. The more I read and learn about search engine optimization and website marketing, the industry experts all seem to be really saying that you have to have good content on your site, and you have to have recommendations from the larger community. Everything I read really seems to say that the best SEO strategy is to build a really good website, rather than to build a shoddy product and market it aggressively.

In short, the invisible hand can not be denied.

45 thoughts on “The efficient market hypothesis and search-engine optimization

  1. Hey, this is a great blog…do you write every night? Curtis and I are reading some cool essays by a guy Gould who apparently wrote a science essay every month for decades and published them all….they’re pretty good.

  2. My writing output wildly oscillates. I’ve been doing a fair amount lately, but then I’ll stop for a while.

  3. Search engines react to black hat exploits by changing the rules — by regulation. So do governments when stewarding markets.

  4. Of course even if these efforts do let the dumper get out and make some money, once the market learns about what is really going on, the stock price craters. See what happened to Enron for one of the most famous examples of how the market reacts to information assymetry.



  5. we can all say that aggressive marketing are unwise strategies that may lead to problems like people cant trust us, but its much wiser if we started slowly by building our reputation through creating quality content for our site so people will sooner or later recognize the things that we are doing.

  6. credibility is what people mostly seek for if they will hire someone for social media,, the reputation and status of a marketing company or social media sites is what other business man's look for in able to trust them for their services. if you have a good and informative site people may actually visit your site more often

  7. Rankings are largely a reflection of the quality and quantity of other websites that link to the site in question, thus SEO is the process of convincing other site owners to link to you. How you're relating SEO to efficient market hypothesis is interesting and fairly accurate when your talking about very broad and general keywords, such as cars, dogs, real estate, etc. Only high quality sites will rank high for such terms. However, lesser competitive terms do still fall victim to aggressive marketing tactics over quality.

  8. Building your credibility first is very important in any aspects, Search engine optimization is now being popular in the web, you had indeed created an informative post. I'm sure some people will have more ideas about SEO with your post

  9. Scrqappy websites are of no use & they not provide any relevant information. Whereas good websites provide relevant & useful information.

  10. Well created websites are a source of information. It should be created with most concentration. Scrappy websites are worthless.

  11. You should also take in consideration the website traffic. The traffic is a very powerful indicator which tells us how many people really use the services of the site constantly and ocasionally.

  12. Now that we are facing economic crisis, I think the key to survive in this problem is the technique in marketing.. These days Social media is the effective tool in the field in marketing and in advertising.. This is really proven and effective..

  13. well content is the king… no wonder informative and interesting websites will always rank higher regardless of how much time rubbish web owners will spend.

  14. Black-hat tactics effect can only been seen in 1 to 2 weeks but it will not make a effect as long as white-hat.. Using SEO to get a tons of traffic is really hard because you have a lot of competitors out there..

  15. Quite a Interesting theory. Aggressive link building is harmful, no doubt about that. But it becomes really hard for a B2B site to have a good SEO just because of good content and side design.. I hope you will agree on that.

  16. Yes, this is an fantastic idea for increase the economic position. But we have to clear idea about the search-engine market and marketer and strong assumption power. Thanks.

  17. Never knew that SEO related so closely to the finance world, i guess that's because the stocks game is a public game which is what SEO is all about (Getting your word to public)

    Thanks for letting us know about the EMH concept, i will be researching it since i got lost in the middle of the article, will to learn some basics first perhaps.

  18. I believe it’s this that search-engine entrepreneurs imply when they talk about how black-hat strategies do not work over time and will most likely backfire. The greater I read as well as find out about seo as well as affiliate marketing, the actual industry experts all appear to be really saying that you must have great content on your site, as well as you need recommendations from the larger community. Everything I read really appears to state that the greatest Search engine optimization strategy is to build a great website, rather than to build the shoddy product as well as marketplace this aggressively.

  19. this all make sense, SEO has been quite a game on the finance world, since almost anything are done online, transactions like payments, buying and selling, services etc.
    and it all involves in businesses, SEO is part of marketing and we all know a business is dead without marketing

  20. Enjoyed this post very much. I’ve bookmarked it so that I can share it with my friends who are new to Twitter. Very useful information. I am taking a graduate class on Emerging Media and the Market this Spring and I have an idea that this post will be a great reference for my class. I look forward to reading more and following your posts
    Have a Good Day!

Comments are closed.