Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Tuesday, November 29, 2005

The Efficient Markets Hypothesis

This site provides one of the most masterful summaries of the Efficient Markets Hypothesis that I have ever read. It is well-written, and it uses little (if any) jargon.
Here is the opening paragraph [h/t to BenS]:

An issue that is the subject of intense debate among academics and financial professionals is the Efficient Market Hypothesis (EMH). The Efficient Market Hypothesis states that at any given time, security prices fully reflect all available information. The implications of the efficient market hypothesis are truly profound. Most individuals that buy and sell securities (stocks in particular), do so under the assumption that the securities they are buying are worth more than the price that they are paying, while securities that they are selling are worth less than the selling price. But if markets are efficient and current prices fully reflect all information, then buying and selling securities in an attempt to outperform the market will effectively be a game of chance rather than skill.

The Efficient Markets Hypothesis is in direct opposition to what is said in this book (a recent advertiser on An Econoclectic Perspective).

One of the best books I have read on this topic is Burton Malkiel's A Random Walk Down Wall Street, though I know there are others that have been written more recently.

Note: I wrote earlier about my surprise that our pension fund managers seem to think there are aspects of the Canadian financial markets that cannot be described by the efficient markets hypothesis.
Who Links Here