Efficient Market Hypothesis vs. The Mind of The Market

The has led to renewed scrutiny and criticism of the hypothesis. Market strategist has stated flatly that the EMH is responsible for the current financial crisis, claiming that belief in the hypothesis caused financial leaders to have a "chronic underestimation of the dangers of asset bubbles breaking". Noted financial journalist blasted the theory, declaring "The upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis." Former chairman chimed in, saying it's "clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations [and] market efficiencies."

Efficient Market Hypothesis will be available on

There are three forms of EMH: Weak, Semi-strong and Strong. Here's what each says about the market.

Efficient Market Hypothesis & The Stork Theory

Efficient market hypothesis has been the subject of debate among the investing academia since its debut in the 1960s. All data points to the fact that investing for the long term is a more profitable strategy then trying to cash in quickly.

Don't Fall For The Efficient Market Hypothesis

"I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis."
Jensen (1978)

"If the efficient markets hypothesis was a publicly traded security, its price would be enormously volatile."
Shleifer and Summers (1990)

"It is disarmingly simple to state, has far-reaching consequences for academic pursuits and business practice, and yet is surprisingly resilient to empirical proof or refutation."
Lo in Lo (1997)

"Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique."
Fama (1998)

"What, then, can we conclude about market efficiency? Amazingly, there is still no consensus among financial economists. Despite the many advances in the statistical analysis, databases and theoretical models surrounding the efficient markets hypothesis, the main effect has been to harden the resolve of the proponents on each side of the debate."
Lo (2000) in Cootner (1964)

Stiglitz show that it is impossible for a market to be perfectly informationally efficient.

Found out what the efficient market hypothesis says ..

In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Semi-strong-form efficiency implies that neither nor techniques will be able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.

DeBondt and Richard Thaler discovered that stock prices overreact; evidencing substantial weak form market inefficiencies.

Efficient Markets, Irrational Investors

But, regardless of whether a market is efficient in its workings or not, the defining point holds. Accurately and consistently predicting the stock market is not viable. If you can’t predict a stock market with full information and rational behaviour, how can you expect to predict it with incomplete information and irrational participants?

He defines an efficient market thus: ‘A market in which prices always “fully reflect” available information is called “efficient.”’.

Efficient market hypothesis and irrational investing

The research of Fama and Shiller has challenged the profession to determine whether fluctuations in asset prices are better explained by psychological and behavioral factors or by a more general theory of how investors react to uncertainty. The Nobel committee concluded that both men have made progress toward this end. The committee also awarded the prize to Lars Hansen, who developed innovative empirical techniques to test whether the market is efficient. I was honored to have been invited to Stockholm to celebrate their awards.

The classic statements of the Efficient Markets Hypothesis (or EMH for short) are to be found in Roberts (1967) and Fama (1970).

What is the 'Efficient Market Hypothesis ..

By the time Shermer is done exposing all the flaws in our mental machinery, you feel inclined to put the efficient market hypothesis right up there with the "stork theory" in sex education.