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Why the efficient markets hypothesis merited a Nobel

He disputes Professor Fama’s leap from evidence that individual investors cannot outperform stock market averages (sometimes termed the “random walk” theory) to the so-called efficient market hypothesis. But this hypothesis is not as grand as it sounds. It relies on a of efficiency: that market prices immediately adjust to all available information.

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

In its simplest form, the debate between traditional and behavioral finance comes down to the difference between : if you believe the efficient market hypothesis, don’t try to beat the market by picking individual stocks, just invest in index funds. If you don’t believe it, try to anticipate the kinds of mistakes other investors are likely to make and take advantage of them (a strategy closely associated with the behavioral economist Richard Thaler, who was considered a likely candidate for the Nobel this year).

Fama, efficient markets, and the Nobel Prize ..

Summers argues that many statistical tests of market efficiency have very low power in discriminating against plausible forms of inefficiency.

This interaction between varying time horizons shifts focus away from a market with efficient information, purposed in the EMF, and towards a liquid market where short and long term investors can always step in to make investments. Furthermore, the market anomalies and discontinuous nature of prices can be accounted for in the FMH.

An article last month by Nicola Anderson and Joseph Noss. For those unfamiliar with fractals, they are objects which have self-similar qualities. Plainly speaking, a fractal is an object that resembles itself on different scales, such as the Sierpinski’s Triangle. According to the Fractal Market Hypothesis (FMH), market prices follow a fractal pattern. In other words, when one looks at prices over different time scales, the graphs resemble each other.
What causes this self-similarity is the interaction between investors purchasing on different time-horizons.

An informationally efficient market can ..

I’d support a Nobel Prize for that piece of work. Obviously I’m not a fan of the Efficient Markets Theory.

Eugene Fama of the University of Chicago represents Ptolemy, asserting that economics revolves around efficient markets. Robert Shiller of Yale University represents Copernicus, contending that efficient markets currently represent a smaller, less significant portion of the universe. (The third winner was Lars Peter Hansen, also of the University of Chicago.)

From this perspective the assertion that markets are efficient serves as an ideological justification for deregulation, while the acknowledgement that individuals sometimes act irrationally merely distracts attention from the larger problem.

He makes it clear that the transition between the intuitive idea of market efficiency and the martingale is far from direct.
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Efficient market hypothesis nobel prize

This year Eugene Fama won the nobel prize in Economics for his work on the Efficient Market Hypothesis (EMH). The idea behind his work is that it is impossible to “beat” the market, because all information about a given stock is available to everyone. That is, the EMH assumes that a stock valued at $60 is in fact worth $60: it is impossible to purchase an undervalued stock. The only way one could potentially make higher returns than the average, then, is to engage in riskier trading where bigger payoffs are possible. Investopedia offers a ; and, as it points out, there are some potential problems with this hypothesis. For example, some investors interpret information differently, and so they will value stocks differently. Another issue some have with the EMH is that some investors have beat the market before (e.g., Warren Buffett). As it turns out, there are some who think an alternate hypothesis may be able to account for many of the problems in Fama’s award winning work.

The Efficient Market Hypothesis, ..

In other words, they seem to favor the inefficient market hypothesis, even though no one has yet won a Nobel Memorial Prize in Economic Science for it.

Efficient Markets Hypothesis Foundations - Asset Class …

Treasuries.

I think many investors have been sold a bill of goods, based on the Efficient Market Theory, which only benefits those large companies or brokers and advisors on the “sell” side.

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