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Are the markets efficient?

Are the markets efficient?

The concept of an efficient market is more applicable today than it was when it was conceived, a truly efficient market is nearly impossible.

The Efficient Market Hypothesis states that random new information will affect the value of securities, and that new information disseminates so quickly among rational investors that it is futile to try to beat the “market portfolio.”

Thirty years ago, this was more of a theory than an observable phenomenon, and plenty of inefficiencies in the dissemination of information and the pricing of securities could be pointed out.

Today, markets and information move so fast with the help of computers, as well as the presence of a much higher number of active investors, that it nearly approaches the efficiency hinted at in the theory.

Despite the technological advances that would seem to support this hypothesis, many academic economists are leaning in the direction of behavioral economics for a more accurate representation of the movement of security prices.

After all, everyday investors and what they believe has a huge impact on the market, and yet, one must admit, most investors are not very well informed or rational. Indeed, the majority of people trade on emotional swings.

Still, the underlying massive institutional investing that often takes place “off the radar” is more likely to be rational and well-informed, and there is no shortage of it. It would be more correct to say that markets today are most efficient, but not entirely.

There will always be short-term trading opportunities that capitalize on various situations. There will probably always be emerging markets as well, and in this space active managers who find and exploit inefficiencies tend to outperform an index for such a market.

But, as computing and market information becomes more and more sophisticated, this advantage may shrink or disappear.

What is defined as a Market Correction?
What is Market Equilibrium?

Keywords: behavioral economics, stock market correction, efficient markets, market theories, investment basics,