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A simple thought experiment: The Efficient Market Hypothesis states that every asset is fairly priced, because anything that CAN be known about it has been ALR
by bgroat 8y ago
A simple thought experiment:
The Efficient Market Hypothesis states that every asset is fairly priced, because anything that CAN be known about it has been ALREADY factored into the calculation of price.
That's like walking down the street, seeing $20 and thinking, "Nah, if there was money on the ground someone would have picked it up ALREADY".
Markets trend towards Efficiency, they are not in themselves efficient
- dnadler 8y agoThe problem with your analogy is that, in the real world, you don't know if the $20 is real or not. It could even be a -$20 bill.
- lend000 8y agoYou could make a similar comparison with evolution -- if the jungle is so competitive, how does the monkey find any food? The answer is that there is fruit available, but the monkey has to invest energy and expertise (both now and via billions of years of evolution) to extract it. The bigger the fruit, the more difficult to get it.
- throwawaymath 8y agoThat's actually not what the efficient market hypothesis (EMH) postulates. The EMH does not state that it's impossible to find opportunities to make a better-than-market return. It states that it's impossible to predict those opportunities. In other words, the EMH does not preclude $20 bills from lying on the street. It does imply that, in an idealized market which is informationally efficient, you cannot predict where people are dropping $20 bills around the city. Your example is one of the most common mis-analogies of what the EMH states. But in point of fact, if the EMH precluded any better-than-market returns, it would not be possible to have a market since you'd have no risk or volatility.