Wednesday, March 24, 2010

Efficiency controversy

My latest piece at Research magazine, about the history and uncertain future of the efficient-markets hypothesis, is up. Excerpt:

Financial theory is in flux. Ideas that once were widely accepted among financial economists are in dispute. In particular, the efficient-markets hypothesis — which dominated academic thinking about finance for decades and influenced the investment industry while never fully being embraced by it — has faced growing skepticism in recent years, and all the more so in the aftermath of the market mayhem of 2008.

The efficient-markets hypothesis, or EMH, holds that the price of a financial asset swiftly and surely reflects information relevant to that asset. Most often applied to a particular type of asset, namely stocks, the EMH suggests there is no way to beat the market through stock-picking skill, at least not with any regularity. Rather, in this view, stock prices move in a “random walk,” buffeted by new information that was not available before (and which may be favorable or unfavorable, versus expectations).

UPDATE: I'm slated to be on the Gabe Wisdom Show to discuss this article on Mon., April 12 at 7 pm ET.

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